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ECO202-Four Types Of Unemployment

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Questions:

1. Explain four types of unemployment
 
2. Explain why the aggregate demand curve slopes downward.
 
3. Suppose the Reserve Bank of Australia increases the interest rate. What happens to the supply and demand for Australian dollars? Does the dollar appreciate or depreciate? Explain with words and a diagram. 2
 
4. Explain the advantages and disadvantages of:
 
(a) A flexible exchange rate regime
 
(b) A fixed exchange rate regime
 
 

Answer:

1.There are four types of unemployment, which are as follows:

Structural unemployment

The structural unemployment is the unemployment in which the technology is the reason to get the people unemployed in the economy. The use of the technology and machinery decrease the labor work. This updating is good as well as a curse for the economy as the labor get unemployed due to the use of the machinery in replacement of labor (Eriksson & Rooth, 2014).

Frictional Unemployment

The frictional unemployment can be defined as the unemployment in which the person who has recently completed their graduation and looking for a job. This type of unemployment has also been seen in the people who are between the jobs. 

 

Cyclical Unemployment

The cyclical unemployment is the unemployment, which occurs in the economy during the time of recession in the country. This type of unemployment is due to the cyclical change in the economy. This type of unemployment will remain in the economy until the demand and supply of the good and services will not be increased again (Eriksson & Rooth, 2014).

Seasonal unemployment

The seasonal unemployment can be defined as the unemployment in which the people remain unemployed for a certain season in the year. This type of unemployment is common in the daily wage workers who are working on the daily basis. For example, the construction workers are found unemployed during the winter season.

2.The aggregate demand curve slopes downwards due to following reasons, which are as follows:

The first reason to have downward sloping Ad curve is Pigou’s wealth effect (SparkNotes, 2018). This is due to the fixed nominal value of money is constant whereas the real value of money varies and depends on the price level in the economy. This provides the high purchasing power in the hands of the consumer due to the low price level in the economy.

The second reason for downward sloping aggregate demand is Keynes interest rate effect in the economy (SparkNotes, 2018). As per the below diagram, it can be said that the price and quantity demanded has an inverse relationship due to which the high price level indicates the low quantity demanded in the economy and vice versa. This is the reason consumer demand more currency when the price level is high in the country. Consumer keeps larger amount of currency in the bank. As the amount of currency in the bank increases, the supply will also rise. Ultimately, the bank has the large funds, banks can able to provide more loan s in the economy. As the supply of loan has been increased, the cost of the loan and their interest rates will also be decreased. This low interest rate depicts the saving by the consumers and thereby the aggregate demand in the economy increased.

The last reason to have the downward sloping aggregate demand curve is Mundell’s Fleming’s exchange rate effect (SparkNotes, 2018). If the price level on the economy falls, the interest rates also fall in the country. The decrease in the domestic currency as compared to the foreign currency interest rate is high; the consumer will invest in the foreign currency interest rate and will get the high return from there. The domestic currency moves to the foreign country and the real exchange rate will decrease and international supplies will increase. These will increase in the net export and ultimately the aggregate demand increases in the economy (Grohé & Uribe, 2013)

 

(Source: ThoughtCo, 2017)

3.If Reserve Bank of Australia increases the interest rate in the country, the demand for Australian dollar will be increased in the foreign market. Higher the interest rates will attract the foreign investment in the country. This will increase the revenues source in Australia.

 

(Source: ThoughtCo, 2017)

On the other hand, the supply of the Australian dollar will be decreased to make the interest rates high in the country. This effect of demand and supply of Australian dollars will appreciate the currency that is the Australian dollar in the foreign market.

 

(Source: ThoughtCo, 2017)

From the diagram, it can be analysed that the Australian currency will appreciates in the market due to the changes in the interest rates of the country by the reserve bank. Another reason due to which the Australian dollar increases in the foreign and domestic market is inflation in the country, which is caused due to the high, inters rate in the country.

4.Advantages of the flexible exchange rate regime are:

  • Making the independent monetary policy to have proper conduct in the domestic market
  • Work as the shock absorber created due to the downfall in the other countries
  • Enhance the economic development and encourage the employment in the country (Hodrick, 2014). 

Disadvantages of the flexible exchange rate regime are:

  • Unstable conditions in the economy with lots of uncertainties  which turn into the low volume of international trade and investment
  • Adverse effect on the economic situations and its structure due to the repercussions
  • Unnecessary movement in capital by using the speculative activities

Advantages of the fixed exchange rate regime are:

  • The absence of speculative activities as there is no revaluation and devaluation in the exchange rate
  • There will be a constraint on the government policy due to the macroeconomic policies in the country.
  • There will be certainty in the country as the trade and investment will be less risky (Hodrick, 2014). 

Disadvantages of the fixed exchange rate regime are:

  • The economy cannot able to respond to the sudden shocks as there is no mechanism to respond to the problem on of payment in other countries
  • Not compatible with the economic targets for growth, inflation and unemployment situations (Hodrick, 2014) 
 

References

Eriksson, S., & Rooth, D. O. (2014). Do employers use unemployment as a sorting criterion when hiring? Evidence from a field experiment. American Economic Review, 104(3), 1014-39.

Hodrick, R. (2014). The empirical evidence on the efficiency of forward and futures foreign exchange markets. Oxon: Routledge.

Schmitt-Grohé, S., & Uribe, M. (2013). Downward nominal wage rigidity and the case for temporary inflation in the eurozone. Journal of Economic Perspectives, 27(3), 193-212.

ThoughtCo. (2017). How Money Supply and Demand Determine Nominal Interest Rates [Online] Retrieved from: https://www.thoughtco.com/nominal-interest-rates-and-money-supply-and-demand-1147766

SparkNotes. (2018). Aggregate demand Curve [Online] Retrieved from: https://www.sparknotes.com/economics/macro/aggregatedemand/section2/

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