# Problem Solving

1. Given a country’s information below for 2008 and 2009, calculate the following:
1. The labor force in 2008 and in 2009
2. The unemployment rate in 2008 and in 2009
3. The labor force participation rate in 2008 and in 2009
4. The inflation rate between 2008 and 2009
5. The real interest rate in 2009

20082009Real GDP\$2,000,0002,2000,000Total Adult Population190,000200,000Employment100,000110,000Unemployment5,0006,000Discouraged Workers1,0001,500Price Index204210Nominal Interest Rate4%3%

2. Consider an economy that initially has a labor force of 2000 workers. Of these workers, 1900 are employed and each works 40 hours per week. 10 units of output are produced by each hour of labor.
1. 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?
2. 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 labor force becomes discouraged at the prospect of finding a job and leaves the labor force. Finally, suppose that whenever total hours fall by 1%, total output falls by 1.4%.
After all of these changes, what is the size of the labor force? How many workers are unemployed and what is the unemployment rate? What is the total output per week in the economy? (Hint: For the percentage decreases, subtract the percent fall from 1, and multiply by the original amount to find the new amount. For example, if employment is 200 and there is a 5% fall in employment, we have: (1-0.05) x 200 = 190.)
3. Given price index of 200 for 2010 and a price index of 210 for 2011, calculate the inflation rate between 2010 and 2011. If the nominal interest rate is 3%, what is the real interest rate?
4. Economic statistics show that the real interest rate in 1998 was 2%. We know that the price index was 195 in 1997 and 200 in 1998. Calculate the inflation rate between 1997 and 1998. What was the nominal interest rate?

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