Sub-part
A
The natural rate of
Concept Introduction:
Natural Rate of Unemployment: The natural rate of unemployment is the unemployment rate under the equilibrium condition.The natural rate of unemployment is the variation between the number of people who would prefer a job in the current wage rate and the number of people who are able to take that job at the current rate. It includes all type of unemployment other than cyclical unemployment.
Sub-part
A
Explanation of Solution
The natural unemployment rate is all unemployment other than cyclical. That implies it as the sum of frictional, seasonal, and structural unemployment. So cyclical unemployment is 2% + 2% + 0.5% = 4.5%
The cyclical unemployment rate is zero under natural rate of unemployment. Since the cyclical unemployment is 2%, so the economy is operating at 2% percent less than its potential
Sub-part
B
The natural rate of unemployment when there is a rise in the cyclical unemployment keeping other types of unemployment as unchanged.
Concept Introduction:
Natural Rate of Unemployment: The natural rate of unemployment is the unemployment rate under the equilibrium condition.The natural rate of unemployment is the variation between the number of people who would prefer a job in the current wage rate and the number of people who are able to take that job at the current rate. It includes all type of unemployment other than cyclical unemployment.
Sub-part
B
Explanation of Solution
Natural rate of unemployment remains unchanged with cyclical GDP going upto 3%. Since the cyclical unemployment is 3%, so the economy is operating at 3% percent less than its potential GDP.
Sub-part
C
The natural rate of unemployment when structural unemployment falls keeping other types of unemployment as unchanged.
Concept Introduction:
Natural Rate of Unemployment: The natural rate of unemployment is the unemployment rate under the equilibrium condition.The natural rate of unemployment is the variation between the number of people who would prefer a job in the current wage rate and the number of people who are able to take that job at the current rate. It includes all type of unemployment other than cyclical unemployment.
Sub-part
C
Explanation of Solution
Natural rate of unemployment will reduce to 4% as structural unemployment reduces to 1.5% from 2%. Cyclical unemployment remains the same, but natural rate of unemployment is now 45. So it is 0.5 % closer to potential GDP.
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