Consider an economy that initially has a labour force of 2000 workers. Of these workers, 1900 are employed and each works 40 hours per week. Ten units of output are produced by each hour of labour.
a. What is the total number of hours worked per week in the economy? What is the total output per week in the economy? What is the unemployment rate?
b. The economy enters a recession. Employment falls by 4%, and the number of hours per week worked by each employed worker falls by 2.5%. In addition, 0.2% of the labour force becomes discouraged at the prospect of finding a job and leaves the labour force. Finally, suppose that whenever total hours fall by 1%, total output falls by 1.4%.
After the recession begins, what is the size of the labour force? How many workers are unemployed and what is the unemployment rate? What is the total output per week in the economy?
By what percentage has total output fallen relative to the initial situation? What is the value of the Okun's law coefficient relating the loss of out-put to the increase in the unemployment rate?