Consider an economy that initially has a labor force of 2000 workers. 1900 of them are employed and each works 40 hours per week. 10 units of output are produced by each hour of labor.
a. What is the total number of hours worked per week? What is the total output per week? What is the unemployment rate?
b. The economy enters a recession. Employment falls by 4%, and number of hours per week worked by each worker falls by 2.5%. In addition, 0.2% of the labor force becomes discouraged and leaves the labor force. Finally, suppose that whenever total hours fall by 1%, total output falls by 1.4%. 1) What is the size of the labor force now? How many workers are unemployed and what is the unemployment rate? What is the total output per week? 2) By what percent has total output fallen relative to the initial situation? What is the value of the Okun's law coefficient relating the loss of output to the increase in unemployment rate?