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Types of Unemployment and Policy Makers

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1.
Compare and contrast the three types of unemployment: Frictional Unemployment, Structural Unemployment & Cyclical Unemployment.
If you were a policy maker which type of unemployment would be most bothersome to you?

2.
What costs are associated with inflation? Explain at least 3 different costs that individuals or businesses experience when inflation rises.

3.
Explain why transfer payments are not included in GDP.

4.
Using the components of GDP covered in section 22.1 of your text, explain which component would be affected by the following (only one component should be chosen for each scenario):
a. You buy an Italian purse.
b. You buy a new house.
c. New lanes are added to Interstate 40.
d. You buy groceries.
e. You buy a new washer and dryer.

5.
Suppose the economy is at a macroeconomic equilibrium as is shown on Slide 40 of the Video link (Below) which is 25.6 Exhibit 1 & 2. The government decides to give every taxpayer a $500 tax refund.
a. What happens to the aggregate demand curve after the refund?
b. What happens to the price level after this change?
c. Is real wealth increased or decreased as a result of the refund?

VIDEO LINK https://vcampbethel.blob.core.windows.net/public/Courses/OL_4020/Unit_5/CPS_OL_4020_unit5/CPS_OL_4020_Unit_5.mp4

6.
Review Section 22.7 in your text. Compare and contrast the results of the Classical Model and the Keynesian model after an expansionary policy. Keep in mind that the economy is in a recession and not at full employment. Address the following:
a. The shape of the aggregate supply curve in each model in both the long-run and short-run.
b. The effect of an expansionary policy on aggregate demand in both the long-run and short-run.
c. The effect of an expansionary policy on the price level in both the long-run and short-run.

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1.
Frictional unemployment means employment because of turnover in the labor market and the time it takes for persons to find jobs. Temporary transition of workers leads to frictional unemployment. Structural unemployment occurs because of an absence of demand for a certain type of workers. For example, there may be an excess of musicians in the economy, the excess supply can lead to structural unemployment. Changes in technology, and changes in market conditions are the main cause of structural unemployment. Cyclical unemployment occurs because of the ups and down of economy over time. For example, when there is recession, unemployment levels are higher. Unemployment because of economic contraction is called cyclical unemployment.
If I were a policy maker, cyclical unemployment would be most bothersome to me. In cyclical unemployment there are more unemployed workers than job openings. This leads to widespread unemployment. Fiscal policy measures and monetary policy measures are taken to address the problem of cyclical unemployment.

2. Inflation has several costs. These are described as menu costs, shoe leather costs, and loss of purchasing power.
First, menu costs are the cost incurred for changing the menu because of inflation. Price lists, quotations, and price displays have to be changed. This is a cost to the business.
Second, the shoe leather cost is time and effort people spend trying to counter-act the effects of inflation.
Third is the loss of purchasing power. Money loses its value when there is inflation. There is a drop in purchasing power of an individual dollar.
Apart from these three traditional items there are several other costs that inflation imposes. Inflation causes a redistribution of wealth ...

Solution Summary

The answer to this problem explains six questions relating to macroeconomics. The references related to the answer are also included.

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