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Labor Market, Trade and Exchange Rates

Please answer the following, each part in approx. 400-500 words.


(a) If standard microeconomic analysis could be applied to the labour market, then there would be no such thing as unemployment.
(i) Explain why the above statement is true in theory
(ii) Explain why the above statement has very limited relevance in reality.

(b) How and to what extent do you think unemployment could be alleviated by making the labor market more flexible?


(a) The static gains from trade are usually expressed in terms of comparative advantage. How, according to the theory of comparative advantage, do nations that open themselves to trade benefit?

(b) What, in line with the economic policy consensus prior to the current global financial crisis, are the more dynamic gains expected from opening a nation to trade?


(a) Suppose the Reserve Bank tried to fix the value of the AUD above its market equilibrium value. What risk do the authorities run?

(b) How could an Australian exporting company use options to minimize the threat of currency appreciation on its profitability, yet not forgo possible gains from a fall in the currency?