1. Define the natural rate of unemployment. Does it ever change?

Why or why
not?
The natural unemployment rate is the unemployment that arises from
frictions and structural changes where there is no cyclical unemployment. It
is influenced by:
Age distribution of the population
The scale of the structural change
The real wage rate
Unemployment benefits

2. In December 1998 the US labor force was 138,547,000; employment was
132,526,000, and the working age population was 296,270,000. What were
the unemployment rate and the labor force participation rate for December
1998.
Unemployment Rate = (# of people unemployed/Labor Force) * 100
o (138k-132k)/(138k) * 100
LF Participation Rate = Labor force /Working Age Population *100
o (138k/296k)*100

3. Define the different types of unemployment and identify reasons for the
existence of each.
Frictional Unemployment
o Normal labor turnoverpeople entering or leaving the labor
force and from the ongoing creation and destruction of jobs.
Such as, taking time off between work.
Structural Unemployment
o People have skills that are not needed or there is a change in
locations.
Cyclical Unemployment
o Due to the peaks and troughs of the business cycles
expansion and declines. These are inherent to the internal
system of the capital systems.

4. Why are economic policy makers especially concerned with aggregate
demand as opposed to aggregate supply?
Aggregate demand is the relationship between quantity of real GDR
demanded and the price level. Economic policy makers can make
easier changes in aggregate demandexpectations, fiscal policy and
monetary policy, and the world economy.

5. What is a recessionary gap, what problems does it create, and what economic
policies will help deal with it?
Recessionary Gap is when POTENTIAL GDP exceeds REAL GDP. Its
when the equilibrium is to the LEFT of the FULL EE lineEconomy is
operating below its full-employment equilibrium.
Problems:
o Labor market underperforms: There are people that want to
work, but cannot work.
o Longer this gap exists, the more damage inflictedskills
atrophy.
o Countries lose out on tax revenue and must increase of public
works support, leading to budget deficits.
Economic policies to help
o Stimulate the economy by increasing demand (American Jobs
Act) through stimulus spending and reducing taxes on
workers

6. What is an inflationary gap, what problems does it create, and what
economic policies will help deal with it?
Inflationary gap is when the REAL GDP is greater than the Potential
GDP. The equilibrium is to the RIGHT of the Full EE line.
Problems:
o More job openings in the market than there are jobseekers
(shortage of labor), employers are forced to raise wages to
attract new workers. This decreases short-run aggregate
supply.
o This raises business costs, leading to increase in price and
decrease in consumer purchasing power.
Economic policies to help
o Raising interest rates (reducing purchasing power and thus
decrease demand)
o Progressive taxation = Forced savings by the government until
equilibrium is reached
o Decrease government spending and/or decrease transfer
payment

7. Explain the multiplier effect and why it is important.
When you inject new demand will lead to more spending, which
creates more income. Equilibrium expenditure increase by MORE
THAN the increase in autonomous expenditure. The multiplier is
greater than 1.

8. Explain the federal government budget cycle, the role of the different
branches of government in creating the federal budget, and the purpose of
the budget.
Purpose of the budget is an annual statement of the outlays and
receipts of the government of the United States. It finances federal
government programs and activities; and achieves macroeconomic
objectives. These are to achieve full employment, sustained economic
growth, and price level stability.
Roles and Cycle:
o Each February president proposes a budget to Congress.
o Congress debates, amends, and enacts the budget in September
(before October)
o President can sign it into law or veto the ENTIRE bill
o House and Senate separately work on the budget in their own
Budget Committees, then resolve any differences
o During the fiscal year, Congress can pass supplementary
budget laws.
o State of the economy influence outlays, receipts, and the
budget deficit

9. Explain the importance of the Employment Act of 1946.
Congressional act that recognizes a role for government actions to
keep unemployment low, the economy expanding, and inflation in
check. Also, keep prices stable. Created the Council of Economic
Advisors that prepare annual economic reports, advise the president
on certain policies, and collect economic data on the economic trends.
Placed fiscal policy responsibility in the governments hands. The
government must have an active role.

10. Discuss the limitation of government fiscal policy
Difficulty of changing spending levels, predicting the future, delayed
results, political pressures and coordinating fiscal policy.
Lag Time = Time that it takes to implement fiscal policy. Involves
changes in or creation of new legislations.
Limited Discretion = Significant part of the budget is reserved for non-
discretionary spending, like Medicare and Social Security.
Information Availability = Policy makers do not have all the needed
information based on the economic reports to accurate predict what
is needed. Forecasting is not a precise science
Crowding-Out Effect = When government borrowing hampers private
sector borrowing. Investors are more likely to buy governments low-
risk bonds than riskier corporate bonds. This hurts corporations
expansion and job creation.