Employment

Question 1

What is another name for the Phillip’s curve?

Answer 1

Short-run supply curve (it’s not clear what the supply is for…)

Question 2

What relationship is summarized in the Phillip’s curve?

Answer 2

The relation (och tradeoff) between high inflation and high unemployment

Question 3

How can the Phillip’s curve be exploited?

Answer 3

By altering supply of money, thus shifting the demand curve

Question 4

What does “sticky wages” mean?

Answer 4

That wages don’t change until next period

Question 5

Describe the process of bargaining for wages

Answer 5

Workers bargain for a nominal wage, based on the expected real wage, i.e. expected W/P, which is realized in the next period

Question 6

In the NAIRU-model, is money supply exogenous or endogenous?

Answer 6

Money supply is exogenous

Question 7

What is the formula for the Phillip’s curve?

Answer 7

∆p = expected ∆p – θ(U – U*)

Question 8

What is the formula for the demand curve?

Answer 8

∆p = ∆M + λ(U – previous U)

Question 9

What makes the demand curve shift upwards in the NAIRU-model?

Answer 9

An increase in money supply

…which leads to intersection at higher inflation and employment, because higher prices means lower real wages, meaning it’s cheap to hire.

Question 10

What makes the supply curve shift upwards in the NAIRU-model?

Answer 10

Expectations of higher prices in the next period

…which leads to intersection at higher inflation and lower employment, because employees bargain for high nominal wages, leading to high real wages which makes it expensive to hire.

Question 11

What makes the demand curve shift downwards in the NAIRU-model?

Answer 11

An decrease in money supply

…which leads to intersection at lower inflation and employment, because lower prices means higher real wages, meaning it’s expensive to hire.

Question 12

What makes the supply curve shift downwards in the NAIRU-model?

Answer 12

Expectations of lower prices in the next period

…which leads to intersection at lower inflation and higher employment, because employees bargain for low nominal wages, leading to low real wages which makes it cheap to hire.

Question 13

Which are the primitives of the NIARU-model?

Answer 13

P = price
Pe = expected price
W = wage rate
U = unemployment
1-U = employment
M = money supply

Question 14

What does “adaptive expectations” mean?

Answer 14

Expectations will be based on last period’s outcome (“looking one year behind”)

Question 15

What is the steady state of the lake model of unemployment?

Answer 15

π U = λ E

…which is rewritten as:
U / L = λ / π + λ

Question 16

What is the formula for mean duration of unemployment?

Answer 16

1 / (1 – Fbar)

…meaning 1 / (1 - probability of getting a wage offer lower than the reservation wage)

Question 17

Which variable is critical to unemployment benefits working?

Answer 17

Turbulence which can mean a sudden loss in skill at layoff, lowering the unemployed person’s potential wage in relation to the benefits they receive.

Question 18

What does search intensity affect in Search model II?

Answer 18

It is more costly to the job-searcher, but increases the likelihood of drawing a wage offer

Question 19

In a welfare state economy in search model II, you are unlikely to search for a job if you are laid off at a later stage in life. Why is this, and what does it lead to?

Answer 19

+ you had time to become skilled (and well compensated) earlier in life
+ employment benefits are a percentage of your previous earnings

• -> benefits are likely to be high
• -> your reservation wage is high
• -> you don’t take the jobs you’re offered
• -> drop in skills
• -> reservation wage in relation to skill level increase
• -> benefits (and thus reservation wage) increases in relation to wage offers
• -> net present value of the opportunity cost of being unemployed is lower when you are older
• -> lower search intensity

Question 20

Name two threats to price stability

Answer 20

The temptation to exploit the Phillips curve (i.e. print money to shift demand curve upwards)

The temptation to print money to raise
NAIRU-model revenues for the government

Question 21

What was Friedman’s contribution to the Phillip’s curve

Answer 21

The realization that nominal wages and real wages are very different, and that the Phillip’s curve only holds in the short run.

Question 22

What does DSGE stand for?

Answer 22

Dynamic Stochastic General Equilibrium models

Question 23

What is U*?

Answer 23

Natural rate of unemployment, i.e. the unemployment rate when expectations are correct p = p(e)

Question 24

State the formula for probability of employment (search model)

Answer 24

1 – F (wbar) = π

Question 25

State the formula for mean duration of unemployment

Answer 25

1 / (1 – F (wbar))

Question 26

What is added when going from search model I to search model II?

Answer 26

• Unemployment compensation is earnings-dependent
• It is possible to retire
• It is possible to be laid off
• You have skills (which increase if you work and decrease if you are unemployed)

Question 27

Why is turbulence relevant to the search model?

Answer 27

Because there is risk for some immediate skill loss at layoff. This impacts search intensity.

Question 28

What is added when going from search model II to search model III?

Answer 28

• Shocks to productivity = wage per unit of skill evolves stochastically on the job

• Layoff costs
each job destruction triggers a tax that is paid to the government

• Age