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 …show more content…
What are the implications of these lags for the debate over active versus passive policy? a.) Lag in the effect of monetary policy can be explained by the actions of households and firms. Monetary policy effects aggregate demand, by changing interest rates, which affects spending. Household and firms, however, may develop their budgets and spending plans in advance; therefore, any change in interest rate caused by changes in monetary policy will take time to take affect. Lag in fiscal policy is caused by the time it takes for changes to move through the political process. A change in spending or tax rates may seem like the fix for lagging aggregate demand, however, by the time a bill passes through the congressional committees, House and Senate and finally, the President, the economy may have already changed. Because it takes time for changes in monetary and fiscal policy to take affect, at which point, the economy may have changed enough to not need aid by the government, our text states that policy makers should refrain from intervening in these ways. The lag between formulation and implementation could cause any changes in either of these areas to end up doing more harm than good. While active monetary/fiscal policy may seem like the proper way to remedy issues with aggregate demand, the unpredictability of the economy make these methods too …show more content…
A budget deficit means that the government is spending more than they are collecting in tax revenue. The difference is being paid for in government debt in the form of bonds. At some point, these debts will come due and the government will need to pay, with interest. To pay for this, the government will need to increase taxes. A budget deficit today equals higher taxes in the future. A government budget deficit means negative public saving, which increases the real interest rate, and subsequently reduces investment in capital stock. This decrease in capital stock decreases workers’ productivity and ultimately wages. A budget deficit today, eventually leads to lower productivity and lower wages in the
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 …show more content…
What are the implications of these lags for the debate over active versus passive policy? a.) Lag in the effect of monetary policy can be explained by the actions of households and firms. Monetary policy effects aggregate demand, by changing interest rates, which affects spending. Household and firms, however, may develop their budgets and spending plans in advance; therefore, any change in interest rate caused by changes in monetary policy will take time to take affect. Lag in fiscal policy is caused by the time it takes for changes to move through the political process. A change in spending or tax rates may seem like the fix for lagging aggregate demand, however, by the time a bill passes through the congressional committees, House and Senate and finally, the President, the economy may have already changed. Because it takes time for changes in monetary and fiscal policy to take affect, at which point, the economy may have changed enough to not need aid by the government, our text states that policy makers should refrain from intervening in these ways. The lag between formulation and implementation could cause any changes in either of these areas to end up doing more harm than good. While active monetary/fiscal policy may seem like the proper way to remedy issues with aggregate demand, the unpredictability of the economy make these methods too …show more content…
A budget deficit means that the government is spending more than they are collecting in tax revenue. The difference is being paid for in government debt in the form of bonds. At some point, these debts will come due and the government will need to pay, with interest. To pay for this, the government will need to increase taxes. A budget deficit today equals higher taxes in the future. A government budget deficit means negative public saving, which increases the real interest rate, and subsequently reduces investment in capital stock. This decrease in capital stock decreases workers’ productivity and ultimately wages. A budget deficit today, eventually leads to lower productivity and lower wages in the