Question

Discussion #7 - Unemployment, Money & Banking

Inflation and unemployment are the major macroeconomic problems facing any nation. After an intensive discussion of CPI and inflation rate in chapter 24, chapter 28 of the text is focused on calculating unemployment rate. Unemployment statistics are influenced by the size of the labor force and labor force participation rate. Please read the PPT slides posted on Canvas on how to calculate unemployment rate, labor force and labor-force participation rate.

1. Name four sources of unemployment and which of these sources count as natural rate of unemployment, that is, occur at “full employment GDP?” (5 points)

One of the tools used by policy makers to fight inflation and unemployment resulting from the business cycles is monetary policy. Unemployment and inflation pose policy dilemmas because when we try to reduce unemployment, we create inflation and as we try to fight inflation, unemployment may increase. Chapters 29 and 30 of the text covers money, banking and monetary policy. In fighting inflation or unemployment, the FED has often used monetary policy tools.

2. Name 3 to 4 monetary policy tools and discuss ONE, which the FED uses most often. (5 points)

Answer 1

The four sources of unemployment are :

Cyclical unemployment : It is an involuntary unemployment resulting out of recession when employees are being forced to leave the job.

Seasonal unemployment : It arises due to seasonal changes and it occurs during a particular season of the year.

Frictional unemployment : It is a natural unemployment arising when the workers switch jobs. It is a temporary unemployment.

Structural unemployment : It is also termed as natural unemployment arising when the worker's skills do not match the skills needed on the job. It is relatively permanent.

Frictional and Structural unemployment are natural sources of unemployment.

2. The monetary policy tools used by FED to fight inflation are :

CRR : It is Cash Reserve Ratio which is the percentage of cash the commercial banks need to maintain with the FED.

Repo Rate : It is the rate of interest at which FED lends money to commercial banks.

Statutory Liquidity Rate : It is the ratio of the reserves the commercial banks need to maintain in the form of gold with FED.

Reverse Repo Rate : It is the interest earned by commercial banks on the amount deposited with FED.

CRR is the tool which is being used most often by FED to fight against inflation.