Question

Read the following paragraph and answer question 44. Country Hippo experiences a high level of unemployment and there are few jobs that people can compete for. About 50% of those unemployed have been looking for work for a year or longer. There are several reasons why people choose to not seek employment. The government decided to help unemployed people by increasing unemployment benefits. 44. Which one of the following statements is correct? 1. There will be an upward movement along the WS curve indicating a higher real wage and lower unemployment. 2. The natural rate of unemployment will decrease to ensure that the bargained real wage is equal to the implied real wage. 3. The natural rate of unemployment will increase to ensure that the bargained real wage is equal to the implied real wage. 4. The rate of unemployment will be lower and the bargained real wage will be equal to the implied real wage.

Answer 1

Read the following paragraph and answer question 44. Country Hippo experiences a high level of unemployment and there are few jobs that people can compete for. About 50% of those unemployed have been looking for work for a year or longer. There are several reasons why people choose to not seek employment. The government decided to help unemployed people by increasing unemployment benefits. 44. Which one of the following statements is correct?

Correct choice:

3. The natural rate of unemployment will increase to ensure that the bargained real wage is equal to the implied real wage.

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Explanation:

The country witnesses a high level of unemployment. There are a few jobs to compete for. Most of the unemployed have been looking for a job for more than one year. By offering generous unemployment benefits, it is only going to encourage people to keep looking further. The frictional unemployment is bound to rise. Further, people will compare the wage rate with the benefits that they are getting. Thus, the bargained wage rate will be higher, and firms will have to adjust accordingly. Thus, the natural rate of unemployment will slowly rise, and so will the expected wages.

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Reasons why other options are incorrect:

Higher unemployment benefits may push wages higher, but unemployment will also increase. This will effect the natural rate of unemployment itself. Eventually, bargained and actual wages may become equal. Thus statements 1, 2 and 4 are only partially correct.