Suppose that in January 2014 in your country 200 million peo

Suppose that in January 2014 in your country, 200 million people are working 20 million are not working but are looking for work, and 40 million are not working and have given up looking for work.

Solution

Q1. Labor force constitute of people who are either employed or unemployed but are looking for work.

It does not include those who are unemployed but are not looking for work.

In given case, 200 million people are employed, 20 million are unemployed but are looking for work.

So,

Labor Force = 200 million + 20 million = 220 million

While calculating official unemployment rate, only those unemployed workers who are looking for work are counted as officially unemployed.

So,

Unemployment rate = Total number of unemployed persons/Labor force

                             = 20 million/220 million

                             = 0.0909 or 9.1%

Thus, the official unemployment rate for the month is 9.1%.

Hence, the correct answer is option (B).

Q2. Consumption equation is as follows -

C = 100 + 0.75Y_D

In above equation, coefficient of Y_D represent MPC (Marginal Propensity to Consume).

Thus, MPC is 0.75.

Calculate Value of Multiplier -

Multiplier = 1/1-MPC = 1/1-0.75 = 1/0.25 = 4

The Multiplier in this economy is 4.

Hence, the correct answer is option (D).