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1-Trade Unions and Bargaining Power: Answer: Natural Rate of Unemployment

An increase in government spending in a closed economy would lead to: 1) Increased output as firms see higher profits and expand production to meet rising demand. 2) Increased investment as the marginal efficiency of capital and prices rise, making investment more attractive. 3) Increased consumption as people's disposable incomes rise from the higher government spending, though not all the additional income would be consumed.

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Waqas Sarwar
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55 views

1-Trade Unions and Bargaining Power: Answer: Natural Rate of Unemployment

An increase in government spending in a closed economy would lead to: 1) Increased output as firms see higher profits and expand production to meet rising demand. 2) Increased investment as the marginal efficiency of capital and prices rise, making investment more attractive. 3) Increased consumption as people's disposable incomes rise from the higher government spending, though not all the additional income would be consumed.

Uploaded by

Waqas Sarwar
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Q#l describe separately the effects on the natural rate of unemployment of

(1) A decline in the bargaining power of unions


(2) A rise in the replacement ratio / Unemployment benefits
Answer:
Natural rate of unemployment
The natural rate of unemployment is largely a monetarist concept. It is the level of
unemployment which exists where aggregate demand of labor equals aggregate supply of labor
at the current wage rate. The factors determine the natural rate of unemployment are supply side
factors the natural rate of unemployment falls due to increase in mobility of labor, an
improvement in the education and training, a reduction in the state unemployment benefits and a
reduction in trade unions restrictive practices.

1- Trade Unions and bargaining power

The union main motive is to secure the rights of labor so, that they cannot be exploited.111etrade
union does a lot for the laborers when even there is inflation; they tried to get a
proportionateincrease in the wages of labor. Sometimesthe laborers have to be on strike to force
the owner to except the genuine demand of labor Trade unions sometimes follow
restrictivepractices I-e.
They restricted the supply of labor to increase there wages. This is an importantweapon in the
hands of trade unions. If there is a decline in the bargaining power
of unions it is clear that they want be able to act on there restrictive practices and
Hence the unemploymentrate may fall.

2-Unemployment Benefits/Replacement ratio

Unemploymentbenefits mean a money grant by the government to the unemployedpersons. This


policy is common only in the developed countries of the world. It will look reasonable to a
commonman but there are certain persons who regularly get this benefit they get use to it and
they are not ready to work if one makes them offer because they are getting money without
doing any work. They become sluggish and easy going. If this benefit is further increased it is
obvious that since the labor gets now more unemploymentbenefits they will prefer to be
withoutjob. So the rate of unemploymentgoes upon the other hand if these benefits are reducing
then off course the laborers will be forced to work this may lower the rate of unemployment.

Q#2"Both expected & unexpected inflation have economic cost" Discuss

Answer: Inflation and economic cost


Both expected and unexpected inflation have
Economiccosts

The cost of expected inflation

1- Menu Cost
The cost of inflation arises because high inflation induces finns to
change there posted prices again and again changingprices is sometimes costly
E-g It may require printing& distributinga new catalog these costs are called
Menu cost the higher the rate of inflation the more often restaurants have to print
a new menus
2- Taxation

Many provinces of the tax code do not take into account the effects of
inflation. Inflation can change individual's tax liability, often in ways that law
makers did not intend.
3- Shoe-leather Cost
A higher inflation rate leads to a higher nominal interest rate
which in turns leads to lowermoney balances. Whenpeople hold lower money
balances they make frequent trips to the bank to with draw money

The cost of unexpected inflation


Unexpectedinflation has an effect which is more
harmful then anticipated inflation.

1- Detour and creditor


Loan agreementspecifies a nominal interest rate. Which is
based on the rate of inflation expected at the time of agreementif inflation turns
out differently then the money the detour pays to the creditor differs from what
both parties anticipated.

2- Pension holders losses


Unexpected inflation also hurts individuals on fixed pension
workers and firms often agree on a fixedpension. When the worker retires due to
unexpected inflation worker is hurt when inflation is higher hen expected.

Q#3 Discuss the permanent income hypothesis.

Permanent income hypothesis

This theory was presented by


monetarist Milton Friedman in 1957. The starting point of the theory is that
consumptiondepends upon permanent income. It is the income which a
consumer hopes to get in the coming years so Friedman has given stress on
permanent income where as Keynes had given stress on current income &
relative income.
So we say, Cp=f(Yp) this meansthat consumers permanent consumption (cp)
depends upon his permanentincome (Yp)

Q#4 what are the determinants of money demand.


Answer: Determinants of money demand

Demand for money or liquidity I-e the


demand to hold money in cash is one and the same thing. The determinants of money
demand are the followings
1- Desires of a person
This means the demand for money for day to day needs.
We, in our practical life have countless desires which give rise to the demand of
scores of goods on every step we need money to fulfill our desires all economic
wants need money for there fulfillment. It is clear that the demand of rich people
is more then demands of the poor.
2-Need of money for work
A part from day to day motive we also need money for
business motive firms need a ready cash all the times for there business needs I-e
sometimes they have to make payments for raw materials, transportation,
advertisement,and payment to the labor. So, they always need a ready cash for
there business needs
3-Emergency need
somepeople are more careful then others they feel that they
can come across an emergency at any time so, to keep themselves ready for
the emergency they always keep ready cash with them the emergency can be
an operation of the family member or an accident etc.
4-8 pecula tives
Speculationmeans to make use of the price changes. If
the price of commodityfalls and people expect it to rise in future they
purchase it and when price actually rises they sell it and earn profit. Same
applies to the share market.

Q#5 "An increase in the reserve ratio required of commercialbanks will lead to a
fall in the money supply"True or False? Briefly explain your answer.

Answer: Reserve ratio

All the commercial banks they are


registered with the schedule of central bank so they are called scheduledbank or the
commercialbank. Central bank helps the commercialbank whenever they make a request
it gives them loan by rediscountingtheir bills of exchange.All the commercial banks
have to deposit a certain proportion of there total deposits with the centralbank this ratio
is called the reserve ratio. The reserve ratio is not fixed but keeps on changing with the
circumstances if the central banks want to control inflation it increases the reserve ratio as
a result the banks are left with less reserve. So, there landing power is reduce. During
deDationcentral bank reduces the reserve ratio. So, that there landing power is reduce.

this increase the circulation of money and reduces the intensity of deflation. So, it is true
that an increase in reserve ratio will lead to fall in the money supply
.
Q#6 supposes there is an increase in government spending. Describe the effects on
Output, Investment, and Consumption in a closed economy.

Answer:
I-Output
When Govt. increases the supply of money will increase people
disposable income will also increase. General demand of the people will increase. It
may led to increase in the price level which means that the profit of the firm will
increases hence to earn more profit the firms will follow the policy of expansion I-e
increase in the level of output.
2-Investment
The level of investment in the country depends upon
MEC (Marginal efficiency of capital)
Rate of interest
Here when Govt. spending increase the supply of money also increase so ,
the general demandwill also increase which means increase in the price level
or higher level of MECwill be followed by more investment.
3-Consumption
By consumptionwe mean to spend money on day to day needs
When there is increase in Govt. spending supply of money will increase people
will fmd increase in there income out of the increased income a part will be
consumed and the remainingpart will be saved the entire increase in income is
not consumed This proves that the more Govt. spendingmeans increase in
Consumption.

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