Relationship Between Natural Rate Of Unemployment And Labour Force Participation Rate

Explanation of the calculations behind labour force participation rate and unemployment rate

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1. Explain the relationship between the natural rate of unemployment and full employment.

The rate of unemployment is the percentage of labour force which is unemployed, the equation is:

Unemployment Rate = Number Of People Unemployed X 100

 Labour Force

 The Labour Force Participation Rate is the percentage of labour force working and there age must be 15 or above that is Working Age Population. The equation is:

Labour Force Participation Rate =           Labour Force         X 100

1. The current unemployment rate is 7.5% and the number of people in the labour force is 135,504. Use this information to find the following.
2. Calculate the number of unemployed people.

Unemployment Rate = 7.5% and Labour force = 135504.

Unemployment Rate = Number of People Unemployed

 Labour force.

0.075 = No. of People Unemployed

 135504

No. of People Unemployed = 135504 X 0.075

No. of People Unemployed = 10162.8

          = 10163 (Rounded Off).

1. If the working age population is 196,547, what is the labour force participation rate?

Labour Force = 135504 and Working Age Population = 196547

Labour Force Participation Rate =           Labour Force         X 100

       Working Age population

    = 135504 X 100

       196547

Labour Force Participation Rate = 68.94%

1. Suppose that the number of unemployed people decreases by 2,000 people. Assuming that the working age population remains the same, what would happen to the labour force participation rate? Explain your answer by referring to the relevant equation.

Number of People Unemployed = 10163 – 2000

    = 8163

Revised Labour Force = 135504

Unemployment Rate = Number of People Unemployed

 Labour Force

Unemployment Rate =    8163 X 100

135504

Unemployment Rate = 6.02%

The unemployment rate has declined as the no. of unemployed people decreases by 2000.

1. Tilak has recently moved interstate and has not yet been able to find a new job as a financial advisor. Is Tilak frictionally unemployed, structurally unemployed or cyclically unemployed? Explain your answer.

Frictional Unemployment occurs because of people changing their jobs and moving from one place to another. Demographic change is also included in this type of unemployment.

Structural Unemployment is defined as unemployment arising out of the technical changes such as automation, or from variation in the output because of changes in customers demand.

Cyclical Unemployment is the type of unemployment in which workers losing their jobs because of the ups and downs in the economy and business cycles (Arnold, 2008).

In the present case Tilak has moved interstate and he is facing problem in finding the new job this is frictional unemployment as he moved from one place to another.

Question 2

1. Describe the key roles of the Reserve Bank of Australia (RBA) as specified on their website.

Reserve Bank of Australia (RBA) is Australia’s central bank which provides banking and financial assistance to Government and its agencies, as well as managing Australia’s overseas banking institutions and gold and foreign exchange reserves.

The main role of the Reserve Bank of Australia is to attain a strong financial system, to set a cash rate to attain an inflation target which is medium-term and efficient payments system. Economic welfare of Australian Citizens, full employment and currency supply are the roles of RBA. The role of RBA is governed by the Reserve Bank Act 1995; this provides many powers and obligations which are in relation to Payment Scheme Board, which ensure the advantage of Australian people and Reserve Bank Board. 

1. i)     Assume that the reserve ratio in a country is 8%.  Calculate the simple money    multiplier?  

Calculation of the number of unemployed people and labour force participation rate

R = 8%

Money Multiplier = 1/R

     = 1/0.08

     = 12.5

The reserve ratio in this example is 8%, therefore when a deposit of 8% is receive by the bank. The bank will retain 8% of this deposit as a reserve. The size of simple money multiplier depends on the reserve ratio (R). In this case the simple money multiplier is 12.5 this means that the excess reserve amount bank loans out, the money supply will also increase by 12.5 times.

Suppose that a customer deposit $1200 into their bank account. Based on the simple money multiplier calculated in part i), calculate the final change in the money supply available in the banking system. 

1200 X 12.5 = $15000

Hence, the final change in money supply available in the banking system is $ 15000.

• Calculate the final change in the money supply available in the banking system if the reserve ratio decreases to 4%.  Explain briefly how the money multiplier works.

Money Multiplier = 1/R

= 1/0.04

= 25

Money Supply = 1200 X 25

        = $30000

Money multiplier is actually the expansion of countries supply of money that banks with each dollar of reserve will generate. Additionally the reserves for new loans are created by banks out of these deposits that they reserve. The reserve ratio(R) determines the multiplier, which is actually the proportion of deposits that banks retrieve as their reserve. For example if it is mandatory to maintain a reserve balance of 15% for every $1000 a customer deposits in the bank then $ 150 will be kept as reserve. The remaining $ 850 will be loaned out to other customers. Furthermore the customer will deposit that $ 850 in the different bank suppose that banks reserve percentage is 20% so that bank will retain $170 as reserve and the remaining amount $ 680 will again be given as loan to customers.

The multiplier effect is defined by this cycle as there is continual flow of funds as more people depositing the money and the banks will also lends out the money until the $1000 which is initially deposited will become $ 6667 (1000/0.15) in their deposits

The Reserve Bank of Australia would like to decrease interest rates in the economy. What open market operation (OMO) action should the Reserve Bank of Australia undertake? Explain the OMO process in detail. What will happen to the cash rate, interest rates, inflation and GDP? Draw by handthe effect of the OMO process using the MD-MS diagram.

The Open Market Operations is the process of selling and purchasing the government securities in the open market by the reserve bank. The committee to regulate the flow of funds is the Federal Reserve Market Committee, which is regulated by the Federal Reserve Banking System (Schabert, 2004). The system will directly influence the regression and acceleration of the money supply in the economy. This will affect the interest rate to decrease or increase. If the Reserve Bank of Australia wants to decrease the interest rate, the buying and selling of securities of in the open market will take place. This will lead to increase in the supply of the money and will subsequently increase the amount of investment that means purchases will also increase. Lastly, this will lead to a decrease in the federal fund interest rates.

Effects of decreasing unemployment on labour force participation rate

The effect of OMO process of buying using the MD- MS diagram:

1. The Reserve Bank of Australia will bus securities from open market
2. Banks monetary funds and reserves will increase.
3. Bank will give more money as loan.
4. Low interest rates will attract more borrowers.
5. Inflation will change and GDP increases.
6. Money supply will increase and shifts to right (MS1 to MS2) due to the effect of money multiplier.

Question 3

1. Refer to the table below.

Price Level	Real GDP Demanded (in Billions)	Real GDP Supplied (in Billions)
10	100	20
25	75	40
40	55	55
75	25	80
100	15	90
125	10	95

1. Using the information provided in the table above, plotthe Aggregate Demand & Aggregate Supply curves by hand.  Insert your drawing below

1. Identify the macroeconomic equilibrium. Indicate this point on your drawing from part i.

When the real GDP demand curve intersect to the real GDP supply curve that is the equilibrium point (Parkin, 2016). As depicted on the AD- AS diagram shown above, equilibrium point (E) is the intersection point of AD and AS curve. The equilibrium point is at $55 billion.

• Assume potential GDP is at $65 Billion. Illustrate potential GDP on your drawing. Is there an inflationary or recessionary gap? Explain your answer.

 The potential GDP line is the vertical line which represents the level of employment that is full in the AD- AS model. The position of potential GDP on the graph is not affected by the price change. In the previous graph it is indicated that the equilibrium is at $55 billion and $65 billion is the potential GDP. This clearly shows that the real GDP is below potential GDP such that a recessionary gap exits. The economy is operating below the full employment level leading to a recessionary gap and further contradicting the business cycle. The decrease in price is due to the recessionary gap that will further affect in the long run by changing the production levels as a result the unemployment rates will also increase.  

Assume that Australia’s macroeconomic equilibrium is equal to potential GDP. What would happen if the demand for newhouses increases? Using the AD-AS model, explains carefully the immediate and long term effects of the event towards the economy.  Draw by hand the appropriate AD-AS diagram to support your explanation.

This model depicts that the Australian economy was initially in a position of high demand at point A on the AD- AS graph. The Australian economy faced a high rise in the demand for houses this leads to immediate and long term effects on the economy.

If the amount of investment increases and AD= I+ C+ G+ (X- M). The immediate effect will shift the demand curve to the right, that resulted in shifting the market equilibrium from point A to point B and the supply will decrease subsequently. This leads to recessionary gap.

In the long run the supply will tend to decrease because of high demand that leads to increase in the price of the houses. Therefore the supply cure will shift to left, from AS1 to AS2. Consequently the price will increase and quantity demanded will return to the equilibrium point C.

1. Watch the video available at the following link, and write a brief description of the event described in the video.

The customer segment index of South Korea has been increasing but after seven months of growing index there was a downfall in august. This downfall was because of the tension between the president Trump and Kim Jong-un. Korea’s customer segment falls slightly in August. The bank of Korea recorded a downfall of 1.3 points in August. The bank of Korea also described that this downfall may be because of the tensions on the Korean Peninsula occurred by the war of words between Washington and Pyongyang. 

Assume that prior to the event South Korea’s macroeconomic equilibrium was equal to potential GDP. Using the AD-AS model, explain carefully the immediate and long term effects of the event for the South Korean economy. Draw by hand the appropriate AD-AS diagram to support your explanation.

Due to decrease in South Korea’s demand in customer segment the supply will also tend to decrease which tend to shift the equilibrium point. The GDP also decreased and there exists a recessionary gap because of this downfall in the demand and supply in the market. This articulates a decrease in price from P1 to P2.

As there exists a recessionary gap at point B, the prices will tend to decrease and again the demand will increase as low prices attracts the customers and again the customer segment of South Korea will increase. Consequently, the prices will increase again as the demand rise that will again take the economy back to normal  

References:

Arnold, R. A. (2008). Economics, Cengage Learning, USA.

Prankin, M. (2016). Macroeconomics- Australia in the Global environment. Melbourne, VIC: Parkin Bade.

Schabert, A. (2004). Interaction of monetary and fiscal policy via open market operations. Economic Journal, 114(494), 186-206, Doi 1111/j.0013-0133.2004.00205.