a.
To describe: The change in the
a.
Answer to Problem 4NP
In the first year, the unemployment rate is
Explanation of Solution
Given data,
Inflation rate
Natural unemployment rate
In the first year
In the second year,
And, The equation for expectations-augmented Philips curve is as follows:
Substitute the values from above given data in the equation, we get:
Hence, the unemployment rate in the first year is
Therefore, cyclical unemployment is
Now, calculate the unemployment rate for the second year, as calculated in first case:
Thus, the unemployment rate in the first year is
Therefore, cyclical unemployment is
The formula used to calculate sacrifice ratio is given below, whereas sacrifice ratio is the amount of output lost when the inflation rate reduced by
Where,
Since the long run equilibrium of the economy is at inflation rate of
Introduction: Okun’s Law graph representation helps in defining relationship between unemployment and losses in the
b.
To describe: The change in the unemployment rate and the percentage by which output falls short of full employment output along with the sacrifice ratio.
b.
Answer to Problem 4NP
The unemployment rate for each of the four years are
Explanation of Solution
Given data,
Year | 1 | 2 | 3 | 4 |
The formula used to calculate unemployment is as under:
Substitute the values from given data in the equation, we get:
Year | 1 | 2 | 3 | 4 |
Increase in Cyclical Unemployment | ||||
Fall in Output each year |
And,
The formula used to calculate sacrifice ratio is given below,
The total loss of the output in the 4 years is
Introduction: Okun’s Law graph representation helps in defining relationship between unemployment and losses in the GDP of an economy. It explains the link between unemployment and output levels. Output is directly dependent on the amount of labor used in the production. This law intended to tell us how much of a country’s GDP may be lost when the unemployment is above its natural rate. Therefore, okun’s law explains the negative correlation between GDP growth and unemployment.
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