Unemployment and Money Growth and Inflation - Assignment Example

Unemployment and Money Growth and Inflation Table of Contents Question Unemployment 3 Computation of Labour Force 3 I. Labour Force Size 3 II. Labour Force Participation Rate 3 III. Unemployment Rate 4 2. Diagram of the Labour Force Market 4 3. Changes in Law 8 I. Effect on the Demand for Labour 8 II. Wage Is Free To Balance Supply And Demand 8 III. Effect the wage and the level of employment for free wage balance 9 IV: If a Minimum Wage Law Prevents the Wage from Balancing Supply And Demand 10 V. If the Workers Do Not Value the Benefit Arising From the New Law 12 Question 2: Money Growth and Inflation 13 1. Computation for Change in Money Growth 13 I. The price level & the Velocity of Money 13 II. Nominal GDP and the Price Level 14 III. Change in Money Supply with Inflation 14 2. Changes in Bank Regulations Expand the Availability of Credit Cards 15 I. Affects the Demand for Money 15 II. Effect on Price Level 16 III. When the Central Bank Wants To Keep the Price Level Stable 17 3. Hyperinflations Rare In Countries Whose Central Banks Are Independent of the Rest of the Government 18 References 19 Question 1: Unemployment 1. Computation of Labour Force I. Labour Force Size The computation of total labour force is calculated by adding up the total number of people employed (E) and people who are unemployed. The following formulae are followed for illustrating the same. Total Employed population (E) = 19,500,000 Total Unemployed population = 1,120,000 Formulae: Labour Force (LF) = E+U Hence, LF= 19,500,000+1,120,000 = 20,620,000 Thus, the total labour force size of the population is 20,620,000. II. Labour Force Participation Rate Labour force participation rate (LFPR) is calculated as a proportion of total labour force as a portion of the total eligible population. The total population of eligible workforce (P) = Employees Population (E) + Unemployed Population (U) + Not in Labour Force (N) (19,500,000+11,000,000+1,120,000) = 31620000 Formulae for labour force participation rate = (LF/P)*100 Where, LF= 20,620,000 and P= 31620000 Labour rate participation = (20620000/31620000)*100 Hence, Labour Rate participation = 0.6521 III. Unemployment Rate Unemployment rate is depicted as the total portion of the labour force, which remains unemployed. The formulae for the same are illustrated as follows. Unemployment Rate = No. of unemployed workers (U)/Labour Force (LF)*100 (Mankiw, 2008) Unemployment rate = 1,120,000/20,620,000*100 = 5.431 2. Diagram of the Labour Force Market Labour market is an influential market, which reflects a high tendency of reacting to a slight change in the regulation as well as rate of payment. Wage rate has been one of the most important factors that determine the overall structure of the workforce. There is an inverse relationship concerning the demand of labour in market and wage rate. If the wage rate becomes high then labours demand falls and the overall labour force is too expensive to be hired. Other side, when the rate of wages charged are lower labour become relatively cheap and availability for the same increases (Mankiw, 2014). Figure: Labour Force Demand (Prepared For the Specific Study) The above graph it stated clearly that, contraction and expansion of demand would create a situation of increase and decrease of wage rates as well as employment of labour in market. In this content, it could be said that there is visible direct proportion between the labour market demands as well as with the rate of wage charged for the same. Figure: Wage Rate and Employment (Prepared for the Specific Study) Identifiably if there is an increase of customer demand for a particular product, then the market needs to more labour for more productions, so labour demand is increase on the basis of customers demand. This further reflects on the notions that demand for labour is directly linked with the demand for products from consumers. Increase of productivity of labour makes the situation more cost effective for the labours because when the demand increases for labours then cost involved with availing labours are also high. The ‘labour demand curve’ shifts with the business profit or loss. The labour demand curve shifts inward during recession when sales of goods and services are likely to fall below the assumed rate of sales (Mankiw, 2014). Figure: Relationship of Minimum Wage with Supply and Demand of Labour (Source: Mankiw, 2014) This simple diagram would helps in depicting, Supply-demand of labour in market which is simply affected by the gap between the wages prevalent in the labour market. Correspondingly, the review of the above figure elaborates that when supply is in excess of that demanded then wage paid is lower as well as with the rise in demand for labours the wages tends to increase. The minimum rate of wages would predict towards developing an increase in the number of people who are still unemployed within a nation (Mankiw, 2014) 3. Changes in Law I. Effect on the Demand for Labour When the labour cost increases due to the integration of the new law issued by the government, the first option that would be availed by the employers is to absorb the extra cost or must be strategically implementing the need for reduction in current labours. Employers are noted to be always active to reduce the production cost as their strategic plan but the same is noted to be time consuming and involves huge amount of policy change. furthermore changes such as alter capital investments in machinery, buildings, as well as technology, which allow operations that are more efficient in production is noted to be prolonged tasks and has a certain amount of time involved (Hamermes, 2014). On the other hand changing workforce structure and working hours are noted to be quite easier and involves lower amount of formalities less amount of policy involvement. In this case, to manage the change imposed on the organisation due to change in government policies employers should be aligned towards decreasing the amount of labour and reduce the working hour of existing labour to cut down cost involved. Employer should cut the demand of labour from developing and altering the internal needs of an organisation and further enhance its cost effectiveness. On a contrary, this would also hamper the productivity of organisation at the long run (Hamermes, 2014). II. Wage Is Free To Balance Supply And Demand Due to increase of labour cost, demand of labour would fall in market. There would not be any equilibrium between demand-of-labour and supply-of-labour and the market would be in a tumultuous position. When the demand for labour would decrease it would automatically, enhances the rate of supply of labour in the market. It would clearly indicate that the unemployment in market. This phenomenon will lead to a situation of that instigates employers to decrease the amount of labour for cost consumption (Stonecash & et. al., 2011). This would further affect labour’s productivity as well as quality of products thus produced. Based on the needs of the situation employers would mostly cut the type of labours who are not skilled or experienced enough in the task they perform. Rather they would be preferring old, skilled and experience labour within their workforce for ensuring the quality product produced for which skilled labours are noted to be the prerequisite (Stonecash & et. al., 2011). III. Effect the wage and the level of employment for free wage balance According to this law, the government would provide some benefit to employees to raise their cost. When the wage of the labours would increase, the demand of labour will simultaneously decrease leading to a further augmentation in the supply of labour in market. This situation is likely to catalyst an increase in the rate of unemployment in market. Employers would refer to cut down unskilled, inexperience labour to manage the change in cost of employment. Correspondingly, it could be inferred from the review of the above facts that the level of employment followed at the time of cut down is highly focused on the quality of the labours and low on quantity. In accordance to the changed situations, most of the employers would align towards employing skilled labour who would be able to balance the demand and supply of a product in a cost effective manner (Mankiw, 2014). This stress of situation would lead to congestion between employers as well as employees. Additionally, on one side scarcity of skilled labour would enhance the cost involved with consumption of the same whereas the changes situation would further augment the level of unemployment (Stonecash & et. al., 2011). This diagram below reflects on the equilibrium position that is attained by maintaining a certain standard of supply and demand for the same (Mankiw, 2014). Figure: Equilibrium of Employment (Source: Mankiw, 2014) IV: If a Minimum Wage Law Prevents the Wage from Balancing Supply And Demand Price or the wage rate determined plays a crucial role in terms of balancing the supply as well as demand. The minimum wage would help people to meet with the daily needs and prevent a situation of poverty. This would further assist in developing the situation involved with unemployment. If the minimum wage would be above the equilibrium level, as depicted through the following graph, it can be duly inferred that the quantity of labour supplied exceeds the amount demanded for the same. This situation would lead to a further situation of unemployment (Mankiw, 2014). Figure: Labour market with minimum wage (Source: Mankiw, 2014) The minimum wage pattern indicates the increase of income of employed labour, but it would become threat for unemployed labours as well. The impact of the minimum wages is observed to be directly linked with the skills and experience of the workers. Extremely skilled labours would not be affected with this changed criteria of selection imposed due to change in law. However, teenage workers would have great impact on it, because they are less skilled as well as experienced. This class of labour even faces huge amount of burden with their entry cost even when they are willing to accept lower wage as their on-the-job training period (Mankiw, 2014). V. If the Workers Do Not Value the Benefit Arising From the New Law If the workers would not value the benefit, which are arising from the context of increased cost of labour law, then employers would not change the working hours or cut down the less skilled or inexperienced labour from workforce. As well as this situation would not hamper the equilibrium of demand and supply of labour. Furthermore, this synthesis of skills will not be hampering the productivity of firm as well (Mankiw, 2014). Question 2: Money Growth and Inflation 1. Computation for Change in Money Growth I. The price level & the Velocity of Money Price Level is formulated as a ratio between Nominal GDP and Real GDP. The formulae for the same is depicted through the following sections Price Level (P) = Nominal GDP/Real GDP Where, Nominal GDP= €10 trillion Real GDP= €5 trillion That is, $10,000/$5,000 = 2 Velocity of Money The velocity of money is calculated using the following formulae. Velocity of Money (V) == (P*Y)/M Where, P= Price Level Y= Real GDP M= Money growth Hence, P = $100* 2/$5 = 40 Therefore, the Price level is 2 and the Velocity of Money is 40. II. Nominal GDP and the Price Level If M and V are unchanged and Y rises by 5%, then the real GDP is likely to grow by a rate of 5% leading to the fall in price level. The nominal GDP may remain constant. III. Change in Money Supply with Inflation If the central bank wants inflation to be 10%, it will need to increase the money supply 15%. Thus, M*V will rise 15%, causing P*Y to rise 15%, with a 10% increase in prices and a 5% rise in real GDP (Mankiw, 2008). 2. Changes in Bank Regulations Expand the Availability of Credit Cards I. Affects the Demand for Money Demand of money depends on, the price level, the interest rate, real GDP and financial innovation. Changing technologies could affect the quantity of money held; credit card is one such form of financial innovation that can regulate the money held. Generally, this technical innovation would reduce the demand for money at large. Liquid form of money would be decreasing in market and the people belonging to the economy would use credit cards rather than carry liquid cash. It should affect the total economy system as people could purchase beyond their credits limits, without expense any amount of liquid cash leading to an enhanced amount of loan burden. Figure: Demand for money. (Source: Duca & Whitesell, 1991) If the individuals requisite to grip less cash, the ‘demand for money’ shifts to the left, because there will be less money demanded at any price level. The same has been justified using the above diagram (Duca & Whitesell, 1991). II. Effect on Price Level Price level influences the demand of money, it include two types of money, nominal money and real money. Nominal money reflects the quantity of money measured against dollars. The quantity of nominal money demanded is proportional to the price level, for example, if anyone spends $10 for his breakfast before, now he can need to hold $1 more to buy the same thing at a changed price level. Real money is the quantity of money, which is measured in dollars. Real money = Nominal money/price level According to the ‘quantity theory of money’, “an increase in the quantity of money causes a proportional increase in the price level” (Duca & Whitesell, 1991). Now, this situation would state graphically, Figure: Effect on Price level (Duca & Whitesell, 1991) If the central bank does not respond in respect to the prevailing situation within an economy the demand curve would shift to the left of the ‘demand for money’, combined with no change in the supply of money which leads to a decline in the ‘value of money’ (1/P), that further catalyst increase in price level (Duca & Whitesell, 1991). III. When the Central Bank Wants To Keep the Price Level Stable If the central bank desires to retain the price level to a constant position, it should reduce the money supply from the market. This would cause the supply of money curve to shift towards left by the same amount that the demand for money has shifted, resulting in no change in the value of money as well as the price level maintaining an equilibrium level. The same has been clearly stated in the following graph (Duca & Whitesell, 1991). Figure: Stability of Price Level (Source: Duca & Whitesell, 1991) 3. Hyperinflations Rare In Countries Whose Central Banks Are Independent of the Rest of the Government When the inflation will be rising at a rapid pace and becomes totally out of the level of control then the situation go to hyperinflation. It is a critical situation where price rises without control. In hyperinflation, the government increases money supply rapidly, which leads to a high rate of inflation. Additionally, chances of political pressures would be influencing power of central bank in case the central banks are dependent on the government. This stress may lead to a pressure causing enhanced level of money printing which is going to alleviate the problem. If the central bank works independently, the central bank controls the money supply; mainly they control how much money would be printed, so that government could only depend on raising taxes or borrowing (Rajan & et. al., 2011). This would state a critical situation for the overall economy and further affect the overall situation they have been facing. Independent central banks usually have a clearly defined objective of controlling inflation as well as not just print money for the government. Therefore, it clearly states that hyperinflation is rare in those countries where central bank is independent (Rajan & et. al., 2011). References Duca, J. V. & Whitesell, W. C., 1991. Credit Cards and Money Demand: A Cross-Sectional Study. Research Paper, pp. 2-45. Hamermes, D. S., 2014. How Rapidly Do Employers Adjust To An Increase In Labour Costs? Do labour costs affect companies’ demand for labour? pp. 1-9 Mankiw, N., 2014. Principles of Economics. Cengage Learning. Mankiw, N., 2008. Essentials of Economics. Cengage Learning Rajan, K. & et. al., 2011. Theories of Demand for money. Macro Economics-II, pp. 2-86 Stonecash, R. E. & et. al., 2011. Principles of Macroeconomics. Cengage Learning. Read More