Question

Define the following terms. a) Natural rate of unemployment – b) Frictional unemployment – c) Unit of account – d) Open-market operations (OMO) – e) Classical dichotomy – f) Velocity of money – g) Recession – h) Depression – i) Marginal propensity to consume – j) Crowding-out effect –

Answer 1

Ans a) Natural rate of unemployment- Natural rate of unemployment is that rate at which labour market is seen at equilibrium. It is a mixture of structural, frictional and surplus unemployment.This type can be seen in every economy because people are always moving from one job to other in search of better.

b) Frictional unemployment- It is that type of unemployment where person has willingly become unemployed as he/she is looking for a new and better job.It's main reason is changing of job by the worker.

c) Unit of account- It is that function of money which can be utilised to provide value to products, services , recording of things and do calculations.It helps to measure the value of a things in a specified currency and help to compare them.

d) Open market operations- It is the activity of the central bank of the country to provide currency liquidity to other banks.It deals with buying and selling of securities to manage money supply in the economy.

e) Classical dichotomy - It reflects the concept that real variables such as employment, output etc are not dependent on money variables.So the main role of money is to behave as lubricant in effecient manufacturing and exchange of goods.

f) Velocity of money- It is the calculation of the rate which tells about exchange of money in the economy.It shows how many times money has moved from one person/place to other.It is mostly calculated as ratio of GDP of the country to M1 or M2 money supply of the country.

g) Recession - Recession is that phase in the economy where there is fall in the economic activities due to fall in real GDP, manufacturing, income, retail sales and employment.It mostly occurs when there is a great fall in the demand by public.

h) Depression- It is a downfall in the economy of one country or more for a longer period. In this case, there is more serious fall in economic activities than in recession. It is characterized by its duration of time.

i) Marginal propensity to consume - It represents the aggregate rise in the spending of the consumer with the rise in disposable income of the consumer.It represents the proportion of change in consumption to income change .

j) Crowding out effect - It represents a situation where there is decrease in the use of products and services and business investments due to rise in government expenditure and deficit spending, using in hand monetary resources and increasing rates of interest.It shows how raised government's borrowings results in fall in funds required by private sector to meet their investment requirements.