4) Unemployment (Chapter 15) a. What do economists mean by the “full employment

Question

4) Unemployment (Chapter 15)

a. What do economists mean by the “full employment rate of unemployment”? Does every worker have a job at this rate? Explain

b. What causes people to loose their jobs?

c. Does the unemployment rate vary during the course of a business cycle? Explain.

d. If Aggregate Demand remains constant and the economy suffers a reduction in the level of aggregate supply, what will happen to the unemployment rate? What will happen to prices? How is this different if aggregate demand is deficient?

Explanation / Answer

a)

The first definition of full employment would refer to a situation where the economy is operating on its production possibility frontier – there is pareto efficiency. Using AS/AD analysis this would be a situation, where the economy is operating at full capacity, on the vertical part of the LRAS. This would be consistent with economic growth at the long run trend rate of growth. For example, if the Long run trend rate was 3%, it would need economic growth to have averaged 3%. In other words at full employment there is no output gap.

In practise, this concept is hard to pin point exactly. For example, growth could be faster than the long run trend rate leading to a positive (inflationary) output gap.

b)

SEPTEMBER 10, 2012 20 COMMENTS

Ten Reasons Why People Lose Their Jobs

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Millions of people are unemployed. Some have given up looking for work altogether. Many more are underemployed, working shorter hours in a job that may not fit their education, training, and experience.

So many of these people who lost their jobs are the victims of a poor economy or a struggling company or both. They are capable and hardworking, and their unemployment is not due to their lack of effort or desire.

Reasons

c) The "business cycle" is one of the central issues in macroeconomic theory and provides the starting point for understanding the complex relationships between the various measures of macroeconomic performance and the role of government economic policy.

Characteristics of Business Cycles

The overall goal of government economic policy is to promote economic stability. By economic stability we mean an unemployment rate at or near the natural rate, price stability with a low inflation rate, and steady growth in economic output. But policy is not perfect and the economy is constantly subjected to unexpected events. What we typically observe is an economy that fluctuates around these goals. Sometimes the economy is overheated with too much demand and price inflation, other times the economy is in the doldrums with low or negative economic growth and high unemployment.

The short-term fluctuations in economic activity we see are called business cycles. Business cycles are recurring patterns of economic expansion (increasing economic growth and price inflation), thencontraction (declining economic growth and growing unemployment), then expansion again. These two phases are punctuated by a peak at the end of an expansion when a contraction starts and a trough at the end of a contraction when an expansion begins again.

Conclusion:- So I conclude Un employement rate varies according to Business Cycle

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