Basic Macroeconomic Problems - Essay Example

? Ass 5.8 Basic Macroeconomic Problems Ass 5.8 Basic Macroeconomic Problems Unemployment rate refers to a proportion of unemployed people divided by the total labor force (Hall & Lieberman, 2010). Whereby, labor force include all those people who have not attained retirement age and are actively working or searching for a job (Hall & Lieberman, 2010). Therefore unemployment rate may be computed using the formula below; Unemployment rate= Number of unemployed workforce ?100 Total Labor force In this assignment, the numbers of unemployed workers in the U.S in 1991 were 8.4 million while those employed were 108.5 people. In order to determine the official unemployment rate it is important to determine the total labor force. Total labor force = Unemployed work force + employed workers = 8.4 + 108.5 =116.9 Therefore, Unemployment rate= Number of unemployed workforce ?100 = 8.4 ? 100 = 7.2% Total Labor force 116.9 The official unemployment in the US in 1991 was = 7.2% 2. If bureau of statistics considered 1.2 million people as unemployed, the official unemployment rate will be as follows; Official Unemployment rate= Number of unemployed workforce ?100 Total Labor force Total labor force = 108.5 + 1.2= 109.7 Official Unemployment rate= (1.2?109.7)100 =1.1% There was a discrepancy of 6.1% obtained by finding the difference between the two rates of unemployment as follows 7.2%-1.1% =6.1%. The discrepancy may be attributed to an increase in recession and inflation rate leading to a decrease in unemployment rate by 1.6% in the second answer. 3. The Concept of natural rate of unemployment Natural rate of unemployment refers to the rate of unemployment that occurs in a healthy economy when the labor market at equilibrium (Taylor, 2007). At this at this point full employment corresponds with the rate of unemployment. The concept can be presented diagrammatically as shown below. Real Wage ASL N= labor force ADL Natural rate of Unemployment We Q1 Q2 Source: Author Natural rate of unemployment include Frictional and structural unemployment (Mankiw, 2011). Frictional rate of unemployment occurs when people leave their current job and went to look for new better and satisfying jobs (Mankiw, 2011). During this period, people may remain unemployed and therefore, an economy may experience frictional rate of unemployment (Mankiw, 2011). On the other hand, Structural rate of unemployment occurs when new technological changes leads to unemployment because people do not have the required skills and knowledge to do the job and therefore, people need to be retrained in to make their skills correspond to a job need (Woirol, 1996). Distinguishing between “good” inflation and “bad” inflation and why some economists see some inflation superior than others. Economist asserts that a good inflation refers to the one that creates caution to an economy of an impending deflation so that an economy can put in place necessary measures to curb impending deflation (Mceachern, 2012). Additionally, a good inflation can helps in real wage adjustment in case of disequilibrium. On the other hand, economist asserts that a bad inflation is the one that has a depressing impact to an economy making the cost of living to be extremely high and unbearable(Mceachern, 2012). A bad inflation tends to make an economy engage itself in borrowing leading to escalating debts. Additionally, wages and income tend to remain low as the cost of living continues to rise (Mceachern, 2012). This situation could lead to strikes and boycotts as workers pressures employers to increase their salaries and wages in order to cope with high cost of living (Mceachern, 2012).Some economist hold that hyper inflation as a superior as compared with double digit and moderate inflation. This is because hyper inflation makes the economy to become totally depressed as money in circulation losses value making the cost of living unbearable. Lesson 9: Managing the Economy: Fiscal Policy and Its Effects 1 (a).Effects of $20billion tax cut on equilibrium output given that Marginal propensity to consume (MPC=0.75) tax cut of $20 billion will lead to an increase in consumption leading to an increase in aggregate demand by $15billions. This figure is derived through a multiplier effect as shown below; 0.75 ? $20 = $15 billion. The total effect of this reduction can be obtain using a multiplier effects as shown below 1 = 1 = 4 (1-MPC) 1-0.75 Total effect on equilibrium out put will be= 4? $20=$60 billions (b).Effects of $20 billion compared to total effect of a $20 billion increase in government purchase. The aggregate effect of an increase in government spending will be as follows; Aggregate effect = Multiplier ? government purchases = (4 ? $20) =$80 billions. There was a difference of ($ 80-$60) =$40billions. This shows that government purchases have a greater effect than total output. This further means that government purchases causes o significant shift towards the right on aggregate demand than tax effect (Kennedy, 2000). 2. Such a law may be considered be useful because the government may fiscal policy progressive taxation system to stabilize the economy, whereby, during inflation the government economy may increase taxes in order to curb inflation (Kennedy, 2000). On the other hand, during deflation the government may reduce taxes to control deflation by reducing tax burden on consumer’s income (Kennedy, 2000). 3. Under what conditions would rapidly accumulating public debt could make countercyclical fiscal policy more difficult to use? During great depression, countercyclical fiscal policies may not be very effective if are not used proactively due to an increase in both local on foreign debts (Secchi and Villafranca, 2009).Therefore, during this period government may employ monetary policy to supplement the fiscal policy to stabilize the economy(Secchi and Villafranca, 2009). The government may employ monetary policy to regulate the amount of money in circulation by directing central bank to increase the cost of borrowing (Secchi and Villafranca, 2009). On the contrary, the government may direct central bank to reduce cost of borrowing to commercial banks in order to promote growth of some sectors of the economy (Secchi and Villafranca, 2009) 4. A balanced budget is a rule within the US constitution that discourages the government from overspending, whereby, the government should not spend more than its income (Thomas and Carson, 2011). Keynesians theories of economics strongly assert that an economy should adopt a balanced budget to prevent budget deficits (Thomas and Carson, 2011). Keynesian theory was substantiated by neoclassical economies who believed that the level of spending should be equal to the level of income (Thomas and Carson, 2011). On the contrary, post-Keynesians theories believe that having deficit budget is beneficial to an economy (Thomas and Carson, 2011). Reference List Hall, R. E., and Lieberman, M. (2010). Economics: principles & applications. Mason, OH, South-Western Cengage Learning. Kennedy, P. E. (2000). Macroeconomic essentials: understanding economics in the news. Cambridge, Mass. [u.a.], MIT Press. Mankiw, N. G. (2011). Principles of economics. Mason, Ohio, Thomson South-Western. Mceachern, W. A. (2012). Economics: a contemporary introduction. Mason, OH, South-Western Cengage Learning. Secchi, C., and Villafranca, A. (2009). Liberalism in crisis? European economic governance in the age of turbulence. Cheltenham, UK, Edward Elgar in association with ISPI, Institution per gli studi di politica internazionale. Taylor, J. B. (2007). Principles of microeconomics. Boston, Houghton Mifflin. Thomas, W. L., and Carson, R. B. (2011). The American economy: how it works and how it doesn't. Armonk, N.Y., M.E. Sharpe. Woirol, G. R. (1996). The technological unemployment and structural unemployment debates. Westport, Conn. [u.a.], Greenwood Press. Read More