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Unemployment and economic policy

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1. How it is possible for a country to have low inflation, high unemployment rates, and an expanding economy all at the same time. What causes this to happen and as a portfolio manager, what trading strategies could you implement to protect your interest and why you would or would not expect to make a profit. Use graphs and other information to support your answer, where possible.

2. If income elasticity of demand for 14-day and 3-day advance train tickets is 3 and 1.5 respectively, what effect would a high unemployment rate have on the train industry and the economy. Use graphs and other information to support your answer, where possible.

3. If price level is unchanged, what effect will a monetary policy that is contractionary have on the real income level and private placement balance of a country. Use graphs and other information to support your answer, where possible.

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Inflation is triggered by excess demand as an economy approaches and exceeds the full employment level of output. We would expect then that low inflation would indicate a lack of demand. However, in this case we see that the economy is growing, although the economy is not at full employment, and inflation is low. The economy is not at capacity here, but economic growth can occur as long as there are increases in productivity and the prices of inputs, such as oil, are falling. From the Phillips curve, we know that there is a positive relationship between the rate of inflation and the level of demand and therefore between employment and inflation. When inflation increases, unemployment falls, at least temporarily. Using the concept of a NAIRU, we expect that in the long run the economy that high unemployment will result in low inflation. So, this situation is adequately modelled by the Phillip's curve (see attached file "Phillips").

This economy would linger in its current state of low inflation and low demand if it were not for the economy growth that is occurring. This means that output each year is somewhat higher than the last. The economy could be well below capacity and be growing, especially if it were coming out of a recession. As output increases, so will employment and demand. This will eventually fuel prices ...

Solution Summary

Low inflation, expanding ecnomy, and high unemployment rates. Monetary policy and price levels. Income elasticity and high unemployment.