Question

Suppose that due to a poor economy, 1 million workers lost their jobs, causing the unemployment rate to increase to 10%. After a few months of searching, 300,000 of these unemployed workers give up looking for work. How would the decision by these 300,000 people affect the unemployment rate, all else equal? A) The unemployment rate would decrease. B) There is not enough information to answer this question. C) The unemployment rate would increase. D) The unemployment rate would remain unchanged.

Answer 1

The correct answer is option A.

Step-by-step explanation:

Due to poor economy, 1 million workers lost their jobs. This caused the rate of unemployment to increase to 10%. After looking for jobs for a few months, 300,000 people stopped looking. These people will be considered discouraged workers.

Discouraged workers are not included in the labor force or in unemployed people. So, when 300,000 people stop looking for work, the number of unemployed people, as well as labor force, will get reduced.

Since the unemployment rate is the rate of the number of unemployed people to the total labor force, it will decline as well.