Discussion Questions about Business Cycles, Natural Rate of Unemployment, and Stagflation

Q1: Business Cycles and Volatility

Q1. According to a report by IMF in 2007: “World growth in recent years has been much more rapid than at any time since the oil price surges of the 1970s. This growth is being shared across countries to an unprecedented degree. Moreover, output volatility in most countries and regions has significantly declined. Analyses show that these changes in business cycle characteristics and finds that the increasing stability and the associated increase in the durability of expansions largely reflect sources that are likely to prove persistent. In particular, improvements in the conduct of monetary and fiscal policy, as well as in broader institutional quality, have all reduced output volatility. The prospects for future stability should, however, not be taken for granted. Low average volatility does not mean that the business cycle is dead. The abrupt end to the period of strong and sustained growth in the 1960s and early 1970s provides a useful cautionary lesson about what can happen if policies do not adjust to tackle emerging risks in a timely manner”.

Can you prepare a discussion of the above passage using your knowledge on Business Cycles? The report is before the 2008 Crisis. Although it informs about the reduction in the fluctuations around the growth trend (that is what volatility roughly means), it warns about emerging risks.  Make your evaluation based on the business cycle analysis and do a bit research if necessary. Extend your thoughts into the questions; why low/less fluctuations is desirable?, We know the long run economic growth depends on some fundamental factors, then if those are not changing what makes the economy fluctuate in the short run (i.e. put the economy into a recession); What could be the next emerging risks in 2019 compared to 2007 (time of the report) to tackle in the Kingdom, GCC, globally?

Q2. Labor markets are hard to stabilize but easy to upset by policy. Remember we talked about “the natural rate of unemployment” in the class. This rate is specific to a particular economy and it can be low or high depending on some economic factors as we discussed. Please use lecture notes, do your research online and come up with a discussion about the natural rate of unemployment for the Kingdom of Saudi Arabia. You are not expected to come up with a prediction for the rate using a statistical technique of course. However, rather what is expected from you is rather a qualitative (economics backed) assessment of the natural rate of unemployment. As this rate is vital for understanding the long run growth potential and dynamics of a country, your discussion should also include the policy recommendations for lowering this rate as well as the reasons why it is high (if it is). Discussion must include economic reasoning and if necessary backed by references to other sources. However since there might not be many resources on the topic (on Saudi Arabia), do not just depend on a couple of resources and do not adapt their perspectives but built your own reasoning based on what you learned about the natural rate of unemployment, its dynamics, effects on long run growth.In fact, your assessment should be based on changing labor markets phenomenon and its implications in Saudi Arabia at large.

Q3. Stagflation: Output falls, prices rises. An economy faces this situation in some extreme situations. In this question using the AD-AS framework, can you describe an economy facing a stagflation graphically? Next In your analysis show how government policy can correct the output lost in the short run. What would be the cost of such a policy in general? Is it possible to correct both the inflation and the output lost at the same time?