The Natural Rate Of Unemployment Essay

1117 Words Aug 12th, 2014 5 Pages
3.) What is “natural” about the natural rate of unemployment? Why might the natural rate of unemployment differ across countries?

a.) The natural rate of unemployment is described as “natural” because it is beyond the influence of monetary policy created by the Fed. Monetary policy will dictate the money supply, therefore the inflation rate. However, the money supply has no affect on the factors that determine unemployment, such as market power of unions, role of efficiency wages, or the job search process. The natural rate of unemployment is affected by labor market policies (such as minimum-wage laws and unemployment insurance). Because different countries will have different labor-market policies in place, the natural rate of unemployment can vary from country to country.

4.) Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short run trade-off between inflation and unemployment?

a.) A drought that destroys a large portion of farm crops can be called a supply shock. A supply shock is an event that directly alters firms’ costs and prices, shifting the economy’s aggregate-supply curve and thus the Phillips curve. The increased price of these crops (and the products they are a factor of production in) reduces the quantity supplied at any given price level. Employers will need fewer workers to produce the smaller quantity, which will increase the unemployment rate. The reduced supply will also increase the price level,…

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