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What causes economic downturn and increase in unemployment

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Reference no: EM132499424

Assignent: 1. We are using the labor market model with downward rigid wages. What explanations are offered for wages being rigid in the downward direction? Now suppose the demand for labor declines with wages rigid. How does what is shown on the diagram correspond to the method that is used to measure unemployment? (Recall precise definition of unemployment used by Bureau of Labor Statistics.)

2. Schools of Thought in Macroeconomics

a. What are the three schools of thought, and briefly explain the main idea of each theory.

b. How does each one explain what causes an economic downturn and increase in unemployment?

3. Consider the major recession of 2007-2009 as discussed in the text.

a. What were the causes?

b. Which of those causes can be identified with a particular school of thought? Which school?

4. Monetary Policy

The Federal Reserve's main policy tool is setting a target for Federal Funds Rate.

a. What is the Federal Funds Rate (FFR)?

b. How does the Fed influence the FFR?

c. What is the chain of events that goes from lowering the FFR to reducing the rate of unemployment? (Extra Credit: What might go wrong?)

5. Expectations about the future of the economy, including its own policy actions, influence the effectiveness of Fed policy. How is the Fed acting now to control expectations about its own policy actions?

6. Some argue that the Fed should follow a rule in forming its FFR policy. The rule that is most often suggested in known as the Taylor Rule. What is the Taylor Rule? The rule is an equation, but you can describe the rule in prose.

7. Fiscal Policy: Fiscal policy includes both changes in federal taxes and spending.

a. What is the distinction between automatic and discretionary fiscal policy?

b. Describe what happened with both types of fiscal policy during the recession of 2007-09.

8. Last Question: We are now in what is most likely a very deep recession. It is possible that the unemployment rate will top 20%. (We'll see what happens.) What monetary and fiscal policies are being used in an effort to reduce the size of the downturn? By the way, I think that the current recession is a new type - caused by government mandate to close down much of the economy.

Reference no: EM132499424

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