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Chapter 17: Q. 17.1 (page 374)

Explain why the actual unemployment rate might depart from its natural rate.

Short Answer

Expert verified

In the short run, an unexpected drop in aggregate demand can depress real GDP, pushing the actual unemployment rate over the natural rate.

Step by step solution

01

Step :1 Introduction 

The natural rate of unemployment, often known as natural income inequality, is the lowest level of unemployment caused by genuine or voluntary economic forces. Cyclical unemployment refers to the amount of persons who are jobless as a result of the labour force's architecture, such as those who have been displaced by automation or who lack the necessary skills to find work.

02

Step :2 Explanation 

In the long run, an unanticipated increase in aggregate demand might lead real GDP to rise, lowering the unemployment rate below the natural rate of unemployment. Similarly, an unexpected drop in aggregate demand might push real GDP down in the near run, causing the actual unemployment rate to increase above the natural rate.

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Most popular questions from this chapter

Take a look at Figure 17-3. Explain whether the cyclical unemployment rate is positive, zero, or negative at point E2, after the shift in the aggregate demand curve from AD1to AD2. In addition, explain whether the cyclical unemployment rate is positive, zero, or negative at point E3the shift in the short-run aggregate supply curve from SRAS1to SRAS2.

Suppose that the government altered the computation of the unemployment rate by including people in the military as part of the labor force.

aHow would this affect the actual unemployment rate?

b How would such a change affect estimates of the natural rate of unemployment?

c If this computational change were made, would it in any way affect the logic of the short-run and long-run Phillips curve analysis and its implications for policymaking? Why might the government wish to make such a change?

Suppose that more unemployed people who are classified as part of frictional unemployment decide to stop looking for work and start their own businesses instead. What is likely to happen to each of the following, other things being equal?

a The natural unemployment rate

b The economy's Phillips curve

Consider a situation in which a future president has appointed Federal Reserve leaders who conduct monetary policy much more erratically than in past years. The consequence is that the quantity of money in circulation varies in a much more unsystematic and, hence, hard-to-predict manner. According to the policy irrelevance proposition, is it more or less likely that the Fed's policy actions will cause real GDP to change in the short run? Explain.

Consider panel (b) of Figure 17-4, and suppose that the economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment. Then the inflation rate decreases to -1 percent. Does additional cyclical, frictional, or structural unemployment account for the resulting rise in the unemployment rate at point C? Explain briefly.
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