The natural rate of unemployment is the unemployment rate at which the inflation rate has no...

The natural rate of unemployment is the unemployment rate at which the inflation rate has no tendency to increase or decrease. However, the natural rate of unemployment is not fixed. What causes changes in the natural rate of unemployment? Which of the following will not cause the natural rate of unemployment to change?

A. Many previous periods with high rates of unemployment.

B. Changes in the money supply resulting from monetary policy.

C. Changes in labor market institutions.

D. Changes in an economy's demographics.

E. All of the above can cause changes.

Solutions

Expert Solution

It shall be noted that natural rate of unemployment consists of two kinds of unemployment:

Frictional unemployment
Structural unemployment

Prolonged period of high rate of unemployment is called hysteresis effect and because of this, the natural rate of unemployment may change as with this, workers may become de-motivated & de-skilled thus, adding to the unemployment of structural nature.

The change in labor market institutions that would include easing of the restrictive trade practices of labor union or abolition of minimum wage has direct implication on determination of natural rate of unemployment.

The change in economy’s demographics due to some natural calamities or due to sudden geographic or occupational mobility would directly affect natural rate of unemployment.

Thus, the following has the potential to change the natural rate of unemployment.

A. Many previous periods with high rates of unemployment.

C. Changes in labor market institutions.

D. Changes in an economy’s demographics.

The one factor that does not have ability to change the natural rate of unemployment is the change in the money supply resulting from monetary policy. This is because, such policy has a different objective that is of impacting on inflationary pressures in the economy by regulating money supply.

Hence, B. Changes in the money supply resulting from monetary policy would not change natural rate of unemployment

Rahul Sunny answered 1 year ago

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