Question

1. As we’ve learned, a third market – the Labor Market – typically does not reach an equilibrium where supply of labor equals demand for labor. What do we call the “normal” unemployment rate that persists even when wages have [incompletely] adjusted?

2. Say that businesses in the economy collectively think that the markets in which they sell their goods will soon experience increasing demand. In the loanable funds market, (a) which curve(s) do you expect to be affected, and (b) which direction(s) would those curves shift?

3. Say that the government reduces the taxes it collects as a percent of interest income. In the loanable funds market, (a) which curve(s) do you expect to be affected, and (b) which direction(s) would those curves shift?

Answer 1

Question 1

Equilibrium in labor market indicate that at prevailing equilibrium wage, quantity demanded of labor equals the quantity supplied of labor.

However, this does not indicate that unemployment is zero because many people would still be between jobs or may be searching for better opportunities and thus are frictionally unemployed.

Technological change may also be erndering some people structurally unemployed.

So, at labor market equilibrium, frictional and structural unemployment remains.

Sum of these two is called the natural rate of unemployment.

So,

The "normal" unemployment rate that persists even when wages have adjusted is called the natural rate of unemployment.

Question 2

If businesses anticipate that there will be increase in demand for goods they sell in near future then they will expand their production facilities to enhance their ability to produce more to fullfil the increased demand in near future.

This will induce firms to borrow more to finance the stated expansion.

As firms will increase borrowing, demand for loanable funds will increase.

So,

In the market for loanable funds, demand curve for loanable funds will shift to the right.