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(a) In Frictionlandia, the monthly job separation rate is s = 0.1 and the monthly job-finding rate is f = 0.2 per month. A website that allows jobseekers to post their CVs online is established, which increases f to 0.35. Find the steady-state unemployment rate before (u ∗ 1 ) and after (u ∗ 2 ) the website was established.
(b) Find a formula that finds next period's unemployment rate as a function of current period's unemployment rate.
(c) Use the formula you developed and find the unemployment rate over the next year. How quickly does the unemployment rate converge to the new steady-state level?
(d) Now assume that s includes people quitting as well as being laid off involuntarily. Do you think s will change after f increased? If we take the change in s into account, what is your (qualitative) forecast for the steady-state level of unemployment?
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