Chapter 17: Q. 2 - For Critical Thinking (page 392)

Why would using the U6 unemployment rate instead of the traditional unemployment rate almost certainly yield different "appropriate" activist macroeconomic policies?

Short Answer

Expert verified

As a result,stimulus will boost aggregate demand, raise inflation by a full percentage point, and have no effect on the unemployment rate the unemployment rate remains steady, the Fed does not need to reduce its support.

Step by step solution

01

Step: 1 Introduction:

Unemployment occurs in economics when people are unemployed while actively looking for work. The employment rate is determined as a percentage of the total population of jobless people by the total number of people in the labour force who are currently employed.

02

Step: 2 Umemployement Criteria:

In 2012, the Fed took a middle ground by attaching its interest rate objective to the unemployment rate. As soon as jobless rates were high, the (passive) monetary policy was focused on maintaining the targeted interest rate. However, when the objective was altered as soon as the jobless rate went below that threshold, this became active. The other option was to maintain a level of inflation and unemployment.

03

Step: 3 Unemployment rate: 

Target deflation to stay around a certain level means lower unemployment rate, which limits the interest rate's flexibility. Gross Domestic product cannot rise in the long term, therefore unemployment rate remained at its base rate. A stimulus will boost aggregate demand, raise inflation by a full percentage point, and have no effect on the unemployment rate. Because the unemployment rate remains steady, the Fed does not need to reduce its support.

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Most popular questions from this chapter

Why might Fed policymakers, in turn, experience difficulties determining which of the public's inflation expectations are the best signals of inflationary pressures in the economy?


Both the traditional Keynesian theory discussed in a previous chapter and the new Keynesian theory considered in this chapter indicate that the short-run aggregate supply curve is horizontal.

a. In terms of their short-ran implications for the price level and real GDP , is there any difference between the two approaches?

b. In terms of their long-ran implications for the price level and real GDP, is there any difference between the two approaches?

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

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.

The policy relevance of new Keynesian inflation dynamics based on the theory of small menu costs and sticky prices depends on the exploitability of the implied relationship between inflation and real GDP. Explain in your own words why the average time between price adjustments by firms is a crucial determinant of whether policymakers can actively exploit this relationship to try to stabilize real GDP.

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