Q1. A. Identify and define the three types of unemployment. Which do you feel is
ID: 1217500 • Letter: Q
Question
Q1.
A. Identify and define the three types of unemployment. Which do you feel is the most important type of unemployment the government should work to reduce? Explain.
B. What action can the Federal Reserve take to reduce unemployment?
C. Using one of the tools available to the Federal Reserve, explain how the Fed would accomplish the action you listed in response to part B.
D. Assume the economy is currently operating at the natural rate of unemployment, what affects will the action you listed in response to part B have in the short run on output, price level, and interest rates? Please use the AS/AD and Money Market diagrams to illustrate your answer.
E. Again, assume the economy is currently operating at the natural rate of unemployment, what affects will the action you listed in response to part B have in the long run on output, price level, and interest rates? Please use the AS/AD and Money Market diagrams to illustrate your answer.
Explanation / Answer
A) There are three types of unemployment, Cyclical, Structural and frictional unemployment. The most important type of unemployment is Cyclican unemployment which is caused by market changes, Government is in much better position to regulate this type of economic cycles and reduce cyclical unemployment
B) Federal reserve can lower interest rate to renew investment in the economy which would create more jobs, It can also increase money supply in the economy by infusing more cash by buying government bonds etc.
C) Fed is incharge of borrowing rate which is called fed rate the rate at which banks borrow, This rate can be lowered by fed easily and this will result in general reduction of interest rates.
D) If economy is at normal unemployment rate reduction in Interest rate will lead to inflation, Output will also increase and Interest rate will reduce.
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