Question

Real Wage 10 11 0 1 8 9 87,000 88,000 89,000 90,000 91,000 92,000 93,000 94,000 95,000 96,000 Labor 97,000 98,000 99,000 100,000 101,000 102,000 103,000 104,000 105,000 106,000 107,000 108,000

Answer 1

Wage rate increases by 80%, therefore, W₂₀₂₁ = W₂₀₂₀ + 80% (W₂₀₂₀) = 420+ 336 = 756

Price increases by 80%, therefore, P₂₀₂₁=P₂₀₂₀+ 80%(P₂₀₂₀) = 105 + 84 = 189

Real wage = W₂₀₂₁/W₂₀₂₀ = 756 / 189 = 4

In the graph, labor demand (E) corresponding to real wage =4 is 100,000

Therefore, no of jobs available = 100,000

Full potential empoyment = 100,000

Cyclical unemployemnt = 100,000 - 100,000 = 0

Cyclic unemployment rate = 0/100,000 * 100 = 0%

Real GDP = Nominal GDpP / deflator

Deflator = 1 + % change in price = 1 + 0.8 = 1.8

Real GDP = 1,000,000 / 1.8 = 555,555.55