Question

Consider an economy where a fraction f of the unemployed find work every period, and a fraction s of the employed are separated from their jobs every period. Let U denote unemployment, E employment and L the fixed labour force

A. Derive an expression for the unemployment rate, u = U/L, in the steady state.

B. Compute the unemployment rate when s = 0.01 and f = 0.15.

C.  Suppose that f increases to 0.20. What happens to the unemployment rate? Interpret your results.

Answer 1

Ang Consider the above given data Labour forces = employment + unemployment L = EU E - (L-U) 0 2 rate of unemployment U=/ Steady State Condition as fu=st = SE > Consider above equation ④ fu = s(14) Now, we can solve for (4) cally s sif L U=s Stf

(6) S=0.01 f = 0.15 Consider callation S U= Stf U = o.ol - 0.06 0.olta15 unemployment u=0.06 (C) fogo S=0.01 Consider calation 4 U=S saf u = o.ol -0.05 0.01+0,20 U=0.05 Unemployment Interpretation - because finding Jobs (1) increases that unemployment Jobs decreas
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