Unemployment, inflation and deflation

Question 1

Demand deficient (cyclical) unemployment

Answer 1

Caused when there is deficiencies in AD during a recession leading to decreased derived demand for labour.

In the long run this will not last, as the economy will inevitably grow again in the growth stage of the economic cycle and demand will increase.

In involuntary (people are not choosing to be unemployed)

Question 2

Real wage unemployment

Answer 2

When the wage level is set above the point of equilibrium in the labour market (micro concept), and therefore causing an oversupply of workers.

Caused by MNW or TU activity, and likely to last for a long time if not indefinitely.

Voluntary; workers can still choose to work at the equilibrium wage if due to trade unionism, however, this may be hard to do if there is legislation in place.

Question 3

Frictional unemployment

Answer 3

When workers are out of work and seeking employment elsewhere.

Possibly caused by a lack of information on other jobs available within the market.

At the labour market equilibrium; Frictional unemployment will always exist within an economy, as it is part of the natural rate of unemployment.

Voluntary in nature.

Question 4

Structural unemployment

Answer 4

When workers are either living in an area where they cannot be employed, or they lack the required skillset to become employed.

Therefore, caused by geographic immobility of labour or occupational immobility of labour.

Will always be in place within the economy, as it is part of the natural rate of unemployment.

Question 5

Natural rate of unemployment

Answer 5

Consists of Structural and Frictional unemployment.

Also seen by some as the modern definition for full employment, which can theoretically never be achieved.

Question 6

Natural rate of unemployment diagram

Answer 6

Google for answer

Question 7

Phillips Curve in the SR shows…

Answer 7

The relationship between the rate of employment and inflation.

When unemployment decreases, real wage increases, as there is a lower supply of labour and therefore workers are able to use their bargaining power to achieve higher wages in the open market; This causes higher MPC and demand pull inflation.

GOOGLE FOR FULL DIAGRAM

Question 8

Phillips curve in the LR shows…

Answer 8

The economy will adjust in the LR after an increase in employment to a natural rate as before the positive output gap occurred.

Essentially, once there has been an increase in AD caused by high employment SRAS will shift left as wages become more expensive, causing a return to the normal rate of growth, shifting the Phillips curve right.

GOOGLE FOR FULL DIAGRAM

Question 9

Policies to reduce unemployment

Answer 9

Expansionary Fiscal or Monetary policy both increase employment.

Question 10

Policy to reduce Demand deficient unemployment

Answer 10

Stimulation of AD in order to increase derived demand for labour within the economy. Can be done using expansionary F/M policies:

• Low tax - Accelerator
• Govt. Spending - Multiplier