Question

Suppose a country surveys households and finds that 155 million people can be classified as being employed and 10 million people can be classified as being unemployed. The unemployed are people who do not have jobs but are actively looking for work. Given this information, what do we know about the unemployment rate for this country? The unemployment rate for this country is %. (Round your response to two decimal places.) Suppose this country has a natural rate of unemployment equal to 5.56%. What do we know about the size of the output gap, Y - Yn, in this country? The output gap in this country is million units. (Round your response to two decimal places and use a negative sign if necessary.) Now suppose this country has an a = 0.75 (). What do we know about the change in inflation, it T( – 1), in this country between the previous year and this year? The change in inflation is percent. (Round your response to two decimal places and use a negative sign if necessary.)

Answer 1

1> The unemployment rate is = Unemployed /(Total employed and unemployed) = 10/(155+10)=10/165=0.0606=6.06%

2> Okun law states that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP.

The unemployment gap is 6.06%-5.56%= 0.5%

So, the gap is GDP will be 2*(-0.5%)=1%

3> We know that in Phillips curve the rate of inflation gap is -alpha times the unemployment gap.

So, we have -0.75*0.5%=-0.375%

Thus, the change in inflation is -0.38%