Question

1. Explain in your own words why full employment is not defined as zero unemployment?

2. Explain in your own words why Congress choose 3% inflation rather than zero inflation as benchmark for price stability?

3. Illustrate (make a diagram) and briefly discuss the major macro outcome and their determinants.

4. Explain in your own words how Classical and Keynesian macro views differ.

5. Explain in your own words why aggregate demand curve is downward sloping? Include graph with your answers.

Answer 1

1. An economy is said to have full employment when it has only the natural rate of unemployment. The natural rate of unemployment consists of the structural unemployment (people who are unemployed because of lack of skills) and frictional unemployment (temporary unemployment when people move between jobs). In case of natural unemployment, there is no cyclical unemployment. So, when an economy is in full employment, the unemployment is not zero. There is still some type of unemployment consisting of structural unemployment and frictional unemployment. Such unemployment is called natural rate of unemployment.

In case of zero unemployment, all people in the workforce is employed and there is not a single unemployed. Therefore, full employment is not same with zero unemployment.