Q. 1 Suppose that the government alte... [FREE SOLUTION]

Chapter 17: Q. 1 (page 394)

Suppose that the government altered the computation of the unemployment rate by including people in the military as part of the labor force.
$(a)$ How would this affect the actual unemployment rate?
$(b)$ How would such a change affect estimates of the natural rate of unemployment?
$(c)$ If this computational change were made, would it in any way affect the logic of the short-run and long-run Phillips curve analysis and its implications for policymaking? Why might the government wish to make such a change?

Short Answer

Expert verified

Part $(a)$

role="math" $(a)$ As a result,Even if the labour force grows as a result of the military's admission, the number of unemployed workers/laborers remains unchanged.

Part role="math" localid="1651821861743" $(b)$

role="math" localid="1651821864349" $(b)$ As a result, the natural unemployment rate would remain unchanged.

Part $(c)$

$(c)$ As a result,the Phillips curve, both in the short and long run, would remain to correctly anticipate the relationship between jobless and inflation rates.

Step by step solution

Step: 1 Introduction:

Phillips curves shift throughout time due to variations in the natural rate.

The long-run Curve would shift to the right if the problem of unemployment increased, and the long-run Curve would shift to the left if the level of unemployment decreased.

Step: 2 Unemployment rate: (Part a)

Definition: The unemployment rate is the number of persons out of work as a percentage of the total workforce.

The umemployment rate as,

$Unemployment rate = \frac{Unemployed workers}{Labor Force}$

If the government modifies the mechanism for calculating the unemployment rate to include military personnel, the true unemployment rate will fall since the numerator in the above method will grow.

As a result,Even if the labour force grows as a result of the military's admission, the number of unemployed workers/laborers remains unchanged.

Step: 3 Natural rate of unemployment: (Part b)

Definition: The level of unemployment is the lowest rate of unemployment when inflation is steady or when inflation is not accelerating.

Because the inclusion of the troops is neither a structural (industrial reorganisation) nor a frictional shift, the level of unemployment will remain unchanged. As a result, the natural unemployment rate would remain unchanged.

Step: 4 Long-run Phillips curve: (Part c)

The spontaneous rate of unemployment is vertically represented by the long-run Phillips curve. The lengthy Phillips curve will not alter if the level of unemployment remains unchanged. There would be no difficulties for policymakers, and there would be no policy repercussions. The lengthy Phillips curve will shift if the expected level of unemployment varies. A shift in the exact unemployment rate would cause the quick Phillips curve to shift.

This means that changes in the labour force as a result of military participation cannot defy the logic of the lengthy or short-run curves.

The Phillips curve, both in the short and long run, would remain to correctly anticipate the relationship between jobless and inflation rates.