Question

1. As you read each situation, answer the following for each situation:

I. Is the problem Inflation, Unemployment (type), or no problem?

II. Should money be increased? Should money be decreased? Or should neither be done?

III. Government Action Which specific policy(ies) should be used to address the problem? job training programs job information increase discount rate decrease discount rate increase the reserve rate decrease the reserve rate sell govt. bonds buy govt. bonds no change in government policy.

a. Business executives, worried about national conditions, cut back on business investment. This resulted in layoffs in the capital goods industry, reducing consumer spending by the laid-off workers.

b. Computers are replacing workers in the auto industry. These unemployed workers are unable to find new jobs.

c. Inflation is returning. Recent gas prices increases are expected to be followed by food price increases.

d. Worried about talk of a coming recession, consumers decrease their spending. Workers are being laid off as production orders are cut.

e. High technology has moved into the toy industry. Many workers in toys manufacturing plants have been laid off due to their lack of technical skills.

f. Expecting an increase in prices, consumers increase spending. This causes an increase in prices for most goods.

g. The economy is at full employment, but has a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

h. Teachers around the country have quit their jobs because of long hours and low pay. They are looking for work outside of education

Answer 1

1

a)This is a special case of Cyclical unemployment. Here, it is said that the business establishments are cutting back on business investments due to fear of the national conditions. The above process has resulted in lay-offs in the capital goods industry thereby reducing the spending of lay-off workers. Thus, in this case, apart from the cyclical unemployment caused due to economic variations, it also has an issue of decrease in the investment potential of the economy due to market apprehensions. Here, it is assumed that the money spend in the economy is less. Thus, the monetary policy of reduction in the interest rates may be followed so that more money is made available to the investors and thus It could boost the investment potential thereby reducing the layout problems resulting in more spending of the working class in the economy.

b) The given case is an example of Structural unemployment. A structural unemployment occurs when the working class no longer possesses a specific skill set so as to retain the job potential. Here, It is said that the computers are replacing the working class which is caused due to the ability of the computers to replace the work done by the employees in a more efficient manner. Thus, these workers would find it difficult to re-enter the job market. Here, actions like imparting proper training programmes to the workforce could be done so as to retain the work force. Also, the government may induce certain programmes and policies so as to accommodate these work force in certain other sectors so that their job security is maintained.

c) The given case is an example of inflation which requires monetary and fiscal policies to curb them. It states that gas inflation has occurred and there is an imminent risk of having a potential food inflation. These represents of inflation affecting the basic sectors of an economy. The increased price could be curtailed by pulling back some money from the economy by proper actions. Here, the monetary authority may increase taxes so as to attract savings which could result in pulling back a considerable amount of money and hence could result in the reduction of inflation in the economy. The government could also consider about selling the bonds in the market so that some money are spend in the buying which could reduce the rising price levels in the market.

d) The above represents a case of deflation which could lead to recession. It is said that the spending in the economy is reducing due to the fear of a potential recession. Here, in order to encourage spending in the economy, the government may buy bonds thereby inducing some amount of money back to the economy. The monetary authority could also consider about reducing the interest rates so that the savings are now less attractive and thus could lead to more spending in the economy.