Question

1. Sometimes when the U. S. economy starts pulling out of a recession, the unemployment rate actually rises for a time rather than immediately falling. This is commonly referred to as a "jobless recovery". There are 2 reasons for this strange phenomenon occurring. What are the 2 reasons? Explain. (Hint: Refer to the Extra PPT on Unemployment and Chapter 6 of the course text! You could also do an Internet search for "What is a jobless recovery?"!)

2. There are 3 types of unemployment in economics: frictional, structural, and cyclical. The first 2 types together constitute NATURAL UNEMPLOYMENT,, while the 3rd type is the excess unemployment above the natural unemployment (where the natural unemployment rate is believed to be at most 5% for the U. S. economy). Given this, when the economy pulls out of a recession, which type of unemployed workers would be hired first, those who are structurally unemployed or those who are cyclically unemployed? Explain why.

3. During the period 1983-1984, the inflation rate in Israel was 370% . Given this, if a dinner cost 10 shekels in an Israeli restaurant at the end of 1983, how much would that same dinner cost at the end of 1984 in Israel? Show all work and calculations and explain!

4. Between the period 1980 to 1985, policy makers in the United Kingdom worked to lower the inflation rate in the country. They were successful in their attempts. Given this, explain what happened to the unemployment rate in the United Kingdom during this period as a result of this successful policy. (Note that a lower but still positive inflation rate is known in economics as disinflation!)

Answer 1

Answer to Part 1)

A recession in the economy, is defined as a period wherein constant decline in the general price level of goods and services takes place and demand side sees a rapid decline which further reduces supply in the country.

The end result of a recession is that companies need to choose from either of the 3 available options. These are reducing costs of operations, increasing prices or gaining more share in the market in which they are currently operating.

In economic crisis, the best thing to do for an economy is to reduce the cost of operations. The labour force is one of the highest sources of high cost of operation primarily in developed countries such as the United States wherein strict rules of minimum wages apply.

To earn better for themselves, and to be able to reduce their losses, companies are forced to reduce their staff or to switch over to automation and outsourcing their labour requirements. As companies begin to earn back money, they do not switch to traditional forms of hiring but rather stick to the adoption of low-cost labour or automation.

This results in a situation wherein even though companies may grow, the labour force still experiences unemployment in the country.

Please feel free to ask your doubts in the comments section if any.