Chapter 12: Problems 2. Suppose you are given the following information about the Simplistic economy: __________________________________________________________________ Persons over 65 years not actively seeking employment_______________________________________________________20,000 Persons over 65 years actively seeking employment________________________________________________________4,000 Homemakers_________________________________________________40,000 School-age children under 16 years_____________________________________________________________60,000 Military personnel____________________________________________15,000 Persons 16 years and older working________________________________85,000 Persons 16 years and older not working because of illness, labor disputes, vacation, bad weather, or personal reasons____________________________________________________________5,000 Persons between 16 and 65 years actively seeking employment__________________________________________________6,000 __________________________________________________________________ a. Calculate the number of persons in the civilian labor force. b. Calculate the number of persons who are unemployed. c. Calculate the Simplistic economy's unemployment rate. The civilian labor force is the number of persons 16 years of age or older who are working plus those members of the labor force who are unemployed. A member of the labor force is defined as working if he or she is employed either full-time or part-time as a paid employee or is working a minimum of 15 hours as an unpaid employees. An individual is also working ff she has a job but did not work because of illness, bad weather, vacation, labor-management disputes, or personal reasons. Members of the labor force are unemployed if they are both available for work and have actively sought employment in the previous four weeks. Based upon this definition the civilian labor force for the Simplistic economy would be 100,000 (4,000 + 85,000 + 5,000 + 6,000). Given the definition of unemployment, the number of unemployed in the Simplistic economy is found to be 10,000 (4,000 + 6,000). The unemployment rate gives the number of persons unemployed as a percentage of the civilian labor force. It is calculated as the number of unemployed divided by the number of persons in the civilian labor force. This ratio is then multiplied by 100 in order to convert it to a percentage. Thus, the unemployment rate for the Simplistic economy is (10,000/100,000) x 100, or 10 percent. 9. "If pursued vigorously, expansionary fiscal or monetary policies can be used to reduce unemployment caused by inadequate aggregate demand." If this statement is true, why do we still experience periods of cyclical unemployment? There are at least two factors that account for the continued existence of cyclical unemployment. First, to use policy to eliminate this type of unemployment, policymakers must know exactly how much to shift the aggregate demand curve. To obtain the desired shift, they must change government spending, taxes, or the money supply by precisely the amount that will restore full employment. Even if policy-makers know this mount, political and other considerations might prevent the adoption of the appropriate policy. For example, members of Congress might be reluctant to reduce government spending in an election year. Such a reduction might eliminate certain programs that voters desire, and thereby jeopardize politicians' chances of winning the election. The timing of policy is a second factor accounting for the continued existence of cyclical unemployment. If policy-makers act in a timely manner, policy may reduce unemployment; however, ff the), are slow to act, by the time a policy is put into place and has an effect, the economy may have returned to full employment. In thi.~ case, the policy, instead of reducing unemployment, will lead to a higher price level. Thus, problems of obtaining information in order to enact the correct policy, political considerations, and the timeliness of policy will contribute to continuing cyclical unemployment. 10. Can stabilization policy be used to deal with structural unemployment? Why or why not? If we cannot use stabilization policy what - if anything - can policy-makers do to reduce structural unemployment? Stabilization policy cannot be used to deal with structural unemployment. With structural unemployment, the problem is not a lack of jobs. Instead, as technological change occurs, old jobs are destroyed and new jobs are created. The destruction of jobs causes workers to be displaced. The displaced workers do not have the skills necessary to fill the new jobs that are created. Increasing aggregate demand through the use of stabilization policies will simply create jobs similar to the ones created by technical change. Unemployed workers will be unable to fill the jobs created by stabilization policy; therefore, firms will bid qualified workers away from other firms and wages and prices will rise. Unemployment will be unaffected. Thus, stabilization policy cannot be used to deal with structural unemployment. There are several solutions that could be used to reduce structural unemployment. Government could initiate programs to retrain workers. Once equipped with the proper skills, workers should have little difficulty finding employment. Government could also help workers relocate to areas where jobs exist. Without such help, prospective workers may be unwilling to relocate. Firms could be given tax breaks if they either expanded or built new plants in areas where surplus labor existed. Finally, prospective workers could be given incentives to confmue their education. This education may be necessary to survival in a technologically advanced society. Thus, although stabilization policy cannot deal with structural unemployment, there are several actions that can be pursued to deal with the problem.
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