Suppose that 20,000 of the employed switches to jobs in the underground economy. When interviewed by STATIN, 50% of these switchers report that they are not working and not seeking work, while the other 50% report that they are not working but seeking work. a. Explain what happens to the official unemployment rate and the “true” unemployment rate.  b. Illustrate and carefully explain the impact of an increase in the income tax rate from 25 percent to 35 percent on the demand for labour, supply of labour, equilibrium wage and level of employment.

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A: Hi, thank you for the question. As per the guidelines, we are allowed to attempt only first…

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A: Labor force= employed+ unemployed