Part A
The model of the steady-state rate of unemployment assumes that the size of the labor force is fixed. If the size of the labor force is allowed to vary:
a. explain how the job-loss and job-finding processes will differ from the situation when the labor force is fixed.
b. explain how interpretations of changes in the unemployment rate will become less clear?
Part B
Consider two countries: Flexiland and Stuckland. The labor force in each country consists of 100,000 workers. In Flexiland a different 500 workers are unemployed each month. In Stuckland the same 500 workers are unemployed for the entire year. Compare and contrast the unemployment situation in the two countries by explaining:
a. the unemployment rate,
b. the average duration of each unemployment spell, and
c. whether the unemployment is more likely to be frictional or structural.