According to mankiw and taylor

fit in to mankiw and taylora) match to Mankiw and Taylor (2006), un profession means that inability to obtain a work when one is free and suitable to work. Even though in that respect argon several various ways to billhook unemployment, this bottom of the inning be normally quantityd in deuce ways the shootant wait and the Labour Force Survey (LFS).Grant (2000) states that the claimant count is the traditional measure of unemployment in the UK. The number of people betwixt the ages of 18 and 60 claiming unemployment benefit payments such as job seekers allowance from the organization is counted as the claimant count. Therefore, it is relatively cheap and easy to gather data. However, many economists conceptualise that in that respect ar some signifi seatt problems with the claimant count method be bring on of the accuracy of this measure. Powell (2005p.290) tells us, the claimant count overstates true unemployment because many claimants be either non genuinely looki ng for work or not genuinely inactive because they already wealthy person undecl atomic number 18d jobs in the in airal economy. In other words, some people who be working in the black economy and who atomic number 18 not looking for work atomic number 18 included in the claimant count. However, in other ways, it understates true unemployment. The rationale behind this is that the claimant count does not include job little people who are aged under 18 or over 60 or who do not claim unemployment benefits. Further more, some unemployed workers approaching retirement are in addition attaind from the register.The Labour Force Survey (LFS) is now recognised as the second measure of unemployment. According to Grant (2000), the LFS is also known as the ILO (International Labour Organisation) measure because it uses the ILOs definition of unemployment. Contrary to the claimant count, all people who are actively looking for a job in the last 4 weeks are counted as unemployed workers whether they are claiming benefits or not.Both the claimant count and the Labour Force Survey (LFS) have its own advantages and disadvantages. However, both measures dexterity understate the actual unemployment. According to Powell (2005), the power is that they do not count discouraged workers who have given up finding jobs and people who are sort as economically inactive.Unemployment can be defined and categorised in a number of types and ways. Therefore, in this paper, it result be classified in accordance with its causes.First of all, at that place is equaliser unemployment. Grant (2000) tells us that equilibrium unemployment exists when the inwardness pack for labour is equal to the nub interpret of labour and vacancies match with the number unemployed. However, although there is equilibrium at wage set up, people might still unemployed because the vacancies are uninformed to them or they are unacceptable or opposed to take up the vacancies. The chart below shows equilibrium unemployment.(adopted from Powell p.293)This equilibrium unemployment is measured by the distance surrounded by Z and X or E1 EFE. In addition, ASLN curve shows all the workers who are forgeting to work at different real wage prescribes. According to Grant (2000), there are different types of equilibrium unemployment such as frictional, search, casual, seasonal, morphological, technological and residual unemployment.Frictional unemployment occurs where people are between jobs. Because of immobilities in the labour force, a delay or time-lag is created while unemployed workers move from one job to another. Therefore, it explains why people are able to remain unemployed despite there are job vacancies available. Powell (2005) states geographical and occupational immobilities of labour explain why unemployed workers are prevented from filling job vacancies immediately. For lesson, the cost of moving and difficulties of obtaining housing are among the causes of geogra phical immobility. In addition, occupational immobility is ca utilise by the need for training and the effects of restrictive practice and discrimination in labour food markets.Grant (2000) says that search unemployment is a form of frictional unemployment. The newly unemployed workers who have just lost their jobs or who have voluntarily left their jobs might take a prison-breaking beforehand getting a new job. The reason is that they need to search labour markets to see better-paid or higher(prenominal)(prenominal) status employment is available. Therefore, search unemployment takes place when unemployed workers do not accept the first job offer to search for better-paid or higher status employment.Some kinds of unemployment occur when certain groups of workers are kayoed of work between periods of employment. According to Grant (2000), casual unemployment, one of the specific cases of frictional unemployment, takes place because of that reason in a higher place. In other wor ds, casual unemployment occurs when workers are unemployed on a short-term basis in trades. For example, workers in the tourism sector, construction industry and agricultural work.Powell (20005) states that seasonal unemployment is casual unemployment and it occurs in some industries abject seasonal fluctuations in subscribe to. Industries such as farming, tourism and building experience such seasonal patterns of demand. Therefore, fruit pickers and deck chair attendants can be an example of seasonal unemployment.Besides, there is structural unemployment. People can be unemployed because of the changing structure of the economy. According to Powell (2005), structural unemployment arises from the structural decline of industries. For instance, if there are more efficient competitors in the market or there is the decline of demand, the workers in those industries will be becoming unemployed e.g. coal-miners in the UK. Further, he says that structural unemployment occurs when industr ies change their skill requirements. For example, industries ask new skill requirements when they change or introduce ways of producing their products.Structural unemployment has some different forms interchangeable frictional unemployment. Technological, regional and international unemployment are forms of structural unemployment.Technological unemployment is a form of structural unemployment. Grant (2000) say that technological unemployment conduces from the introduction of new technology such as labour-saving technology. Therefore, there will be automation as a result of introducing new technology. Through automation, industries can knock down their demand for labour even though their output is expanding. Accordingly, it can be defined technological unemployment results from those industries using labour-saving technology such as the use of telephone banking and plastic cards.Like technological unemployment, regional unemployment is also connected with structural unemployment. Grant (2000) states that regional unemployment takes place when the declining industry is linked to a specific area. In other words, it occurs because of the decline or mop up of a major employer in a particular area. For example, in the UK, the decline of textile and shipbuilding created a pool of unemployed workers in some regions.According to Grant (2000), international unemployment is also a form of structural unemployment. It occurs when the demand for domestically produced goods and ser iniquitys falls and, consequently, there are cast upd workers losing their jobs. For example, if there are more efficient competitors abroad, consumers might choose goods and services that are produced out of the country. Therefore, the demand for domestically produced goods and services might decrease then firms will wince their employees or will be closed.Finally, there is residual unemployment as a type of equilibrium unemployment. Mankiw and Taylor (2006) state that residual unemploymen t takes place when people are unwilling to work or are not able to work due to disability. Basically, people who are unemployable on a permanent basis cannot play off the demands of modern production methods and the disciplines. Therefore, it can take place in all societies.Disequilibrium unemployment is another kind of unemployment except for equilibrium unemployment. According to Grant (2000), there are two conditions for occurring disequilibrium unemployment. One is that the aggregate supply of labour must exceed the aggregate demand for labour. Another condition is that wages are sticky downwardly (wage stickiness). The graph below shows that there is disequilibrium unemployment of LLZ at the wage rate W. (adopted from Grant p.536)According to Powell (2005), there are two main types of disequilibrium unemployment classical or real-wage unemployment and cyclical, Keynesian or demand-deficient unemployment.Classical unemployment or real-wage unemployment takes place when wages a re fixed at a higher real rate rather than real-wage rate and labour market, caused by trade unions or a authorities-set minimum wage, prevents the real wage rate falling below these higher wages. The graph below shows classical or real-wage unemployment.(adopted from Powell p.297)If labour markets are sufficiently competitive, the market mechanism begins to reduce disequilibrium wage rate to eliminate the overplus supply of labour in the market. However, labour market rigidity or wage stickiness prevents the real wage rate falling below W1. Because of labour market rigidity or wage stickiness, there is the excess supply of labour in the markets and, consequently, classical or real-wage unemployment persists.According to Powell (2005), demand-deficient unemployment (also known as cyclical unemployment or Keynesian unemployment) stems from leakages or withdrawals from the circular flow of income and from the banish multipliers that are then unleashed. In other words, an under- saf e employment equilibrium occurs because of a continuing lack of effective aggregate demand. For example, the flow of income might fall by the size of the net leakage multiplied by the national income multiplier when planned leakage exceeds planned injections.Powell (2005) states that demand-deficient unemployment illustrates the paradox of thrift. It comes from the fact that saving becomes a vice at the aggregate level if people save and others are prohibited from spending the saving. For instance, demand for goods and service reduces when the market is in the recession of business one shot below the trend. Therefore, firms do not need to produce many goods to satisfy decreased consumers demand so that less labour is needed. The start the demand for goods and services, the less the demand for labour is needed. Consequently, firms will reduce the number of their employees then the unemployment will increase.Powell (2005 p.299) tells us, Inflation is best defined as a persistent or unceasing rise in the outlay level, or as a continuing fall in the value of money. Like unemployment, there are some methods to measure swelling the sell bell index (RPI), the PRIX, the RPIY and the consumer value index (CPI).The sell price index (RPI) shows changes in the price of average persons shopping basket. According to Powell (2005), the RPI was used by UK governing body to measure changes in the rate of pretentiousness until 2003 and it measures the headline rate of pretentiousness. The RPI is based on a monthly survey of the prices of consumer goods and services and it is therefore, reason through a weighted average of each months price changes. However, it is impossible to measure all prices. Therefore, the RPI contains 650 items as a representative sample and those items are on a regular basis changed to reflect new products and changing tastes. For instance, subscriptions for Internet service and digital cameras newly entered index compilation.The RPIX is the retail price index excluding owe interest payments. Powell (2005) says that the RPIX measures the underlying rate of fanfare. In other words, it is measured by the formula the headline rate minus mortgage interest rates. The RPIX only includes the council tax revenue while the RPI includes the council tax and the mortgage interest rate. Furthermore, it is used to measure the cost of living of a representative family in the economy as the CPI does. Marcouse et al (2003) tell us that the RPIY is homogeneous to the RPIX. However, it excludes indirect taxes as well as the mortgage interest.The consumer price index covers the prices of consumer goods. It attempts to measure the cost of living of a representative family in the economy like the RPIX. The CPI includes investment goods and goods purchased by the government while the mortgage interest rate and the council tax are excluded from the CPI. According to Powell (2005), in the UK, the CPI will transpose the RPI and the RPIX co mpletely because it is based on the method of measuring the price level used in the European Union.Inflation can be defined and classified in accordance with its causes. There are two different types of splashiness demand-pull and cost-push pretentiousness and those two types of inflation are classified by Keynesians.Demand-pull inflation is caused by too much demand in the economy. In other words, demand-pull inflation occurs when there is too much money chasing too few products. For example, oil and steel. According to Grant (2000), an increase in aggregate demand must rise real output and the price level once the countrys resources are encompassingy employed. The graph below uses a short-run AD/AS diagram to show demand-pull inflation.(adopted from Powell p.306)When the government rises aggregate demand from AD1 to AD2, the government can eliminate demand-deficient unemployment and create full employment although real output and the price level increase. However, once full emp loyment arrives, a go on increase of aggregate demand may cause an upward movement of aggregate demand, shifting the aggregate demand curve from AD2 to AD3 and then excess demand (the vertical distance between W and Z) is created. Although there are several different conditions causing demand-pull inflation, wartime might be an appropriate example.The graph above also illustrates an inflationary gap which is the vertical distance between W and Z. Powell (2005 p.306) tells us, An inflationary gap measures the extent to which excess demand exists at the full employment level of real income or output. Similarly, a deflationary gap measures the extent to which there is deficient aggregate demand.Cost-push inflation occurs as a result of a rise in the costs of production which are not caused by excess demand. Therefore, there is the difference between demand inflation and cost-push inflation. According to Powell (2005), cost theories of inflation are based on the cause of inflation in s tructural and institutional conditions on the supply side of the economy. Cost-push inflation is illustrated in the graph below.(adopted from Powell p.307)An increase in cost will cause a shift in the aggregate supply curve to the left (SRAS1 to SRAS2). The effect of this is to raise prices from P1 to P2 and then the quantity demanded will move from Y to Y1. Therefore, the macroeconomic equilibrium will be moved from X to Z and, consequently, the new macroeconomic equilibrium will be at back breaker Z.According to Grant (2000), there are several causes in which costs might increase independently of the state of demand. First of all, wage push inflation can lead to cost-push inflation where trade unions force wages levels to increase independently of the demand for labour. Another example is a rise in prices of imported materials. Finally, a rise in indirect taxation also gives an example which leads to cost-push inflation.b)(data for this graph adopted from the handout)The graph ab ove shows changes in retail price change and unemployment between 1986 and 1995. It can be clearly seen that there is the kinship between the retail price % change and unemployment rate and those are inversely related.The retail price % change increased from 3.4% to 9.5% between 1986 and 1990. During that period, the unemployment rate decreased from 11.2% to 5.9%. However, once, the retail price % change reduced from 9.5% to 5.9% in 1991, the changes in unemployment started to raise from 5.9% to 8.1%. Between 1991 and 1993, there was a decrease in retail price change from 5.9% to 1.6% while the unemployment rate increased from 8.1% to 10.4%. However, by 1994, the changes in unemployment reduced again (from 10.4% to 9.3%) when the changes in retail price change increased from 1.6% to 2.5%. In 1995, the unemployment rate still decreased while the retail price % change increased.The changes in retail price change was at the peak in 1990 when the unemployment rate recorded the last ra te (5.9%) in the same year. In 1993, the changes in retail price change and unemployment are different. The retail price % change reached the lowest rate (1.6%) when the unemployment rate recorded the highest rate (10.4%) in 1993.Overall, there was a decrease in unemployment rate when the changes in retail price change increased. By contrast, the unemployment rate raised when the changes in retail price change decreased.In other words, the unemployment rate decreased at first, then increased and decreased again. However, contrary to the changes in unemployment, the changes in retail price change increased at first, then decreased and increased again during the same period. Therefore, the relationship between changes in retail price change and unemployment can be analysed that a stable relationship exists between them and they are inversely related. The graph below shows an inverse relationship between retail price % change and unemployment without delay.(data for this graph adopted from the handout)Moreover, we can notice unemployment is low when retail price % change is high and unemployment is high when retail price % change is low from the two graphs above. c)There are some facts which can be suffered from the data and question b. First of all, there is an inverse relationship between inflation rate and unemployment. Therefore, we can expect when inflation rate is low, unemployment is high and, conversely, unemployment is low when inflation rate is high. From this negative association, we are able to expect that unemployment might be changed as a result of changes of inflation rate. It means that there are changes of inflation rate first then the changes of unemployment will happen. isolated from these two facts, the data show the changes regularly repeated. Accordingly, we can expect that inflation can be affected by external factors and governments might be able to influence changes in the rate of inflation and unemployment through choosing their prefe rred combination of unemployment and inflation.First of all, the relationship between inflation rate and unemployment can be explained by Philips curve analysis. According to Powell (2005), A. W. Philips argued that the inverse relationship existed between unemployment and the rate of price inflation. This relationship is illustrated by the Philips Curve as shown in the graph below.(adopted from Powell p.308)The Philips Curve above shows a negative association between unemployment rate and inflation rate. When there is high inflation, unemployment is low and when there is low inflation, unemployment is high.Moreover, Powell (2005) states that the Philips Curve suggests how the conflict between full employment and control of inflation can be dealt with. The reason is that the combinations of inflation and unemployment can be arisen in the short-run as shifts in the aggregate demand curve move the economy along the short-run aggregate supply curve. In the short-run, a rise in aggregat e demand for goods and services leads to a greater output of goods and services and a higher price level. In other words, a lower rate of unemployment will be happened by expanding aggregate demand. Therefore, governments and polity makers not only move the economy from point A to point B but also reduce unemployment rate from U1 to U2. However, a higher rate of inflation is also happened (P1?P2). Accordingly, it means there is a trade off between falling unemployment and increasing inflation. Points such as A and B on the Philips Curve offers polity makers a menu of possible outcomes and, consequently, governments might decide an acceptable combination between unemployment and inflation.According to Mankiw and Taylor (2006), Friedman and P serves introduced expected inflation to help understand the short-run and long-run relationship between inflation and unemployment. Expected inflation measures how much people expect the overall price level to change. The graph below introduce s the role of expectations into the inflationary process.(adopted from Powell p.311)In the graph above, we assume unemployment is initially at its natural rate (UN) and price inflation equals wage inflation. When a government pursues an expansionary financial policy to expand demand, the economy moves along Philips curve SRPC1 (from point A to Point B). At point B, unemployment is below its natural rate, but inflation rises to P1. Consequently, in the short-run, inflation rises above expected inflation and workers may suffer money illusion, the false belief that an increase in money wage is also a real wage increase.However, a point such as B is unsustainable because people get used to this higher inflation rate and they increase their expectations of inflation. Firms and workers, therefore, consider higher inflation when setting wages and prices in order to rectify the real wage. The short-run Philips curve, accordingly, shifts to the right (from SRPC1 to SRPC2). Consequently, th e economy ends up at point C where there is higher inflation than at point A, but with the same level of unemployment.Powell (2005) says that once the economy reaches at point C, any further expansion of aggregate demand moves the economy to point D and inflation rate of P2. The reason is that this situation will continue if there are higher expected rates of future inflation. Therefore, it gives explanations why unemployment rate regularly decreases then increases and why inflation rate is always positive. Furthermore, it also explains why the changes in inflation rate and unemployment are repeated. Apart from the Philips curve, Keynesian theories of inflation are also helpful to understand the facts which are found. The graph below shows an upward-sloping SRAS curve.(adopted from Powell p.279)According to Powell (2005), Keynesians now believe the SRAS curve slopes upward and upward-sloping SRAS curve shows that an increase in the price level is necessary to persuade companies to s upply more output. It, therefore, explains why unemployment is changed as a result of changes in the rate of inflation. A rise in the price level (from P1 to P2) reduces the real wage rate. Therefore, firms can employ more labour and supply more output and, consequently, unemployment will decrease to increase supply. Moreover, governments can inflate the price level and approach full employment through an increase in aggregate demand. The graph shows an increase in aggregate demand is reflationary or inflationary. It means that expansionary fiscal or financial policy reflates real output and create jobs, and inflates the price level. Therefore, a rise in aggregate demand moves the economy towards full capacity and, consequently, the economy will be able to approach full employment and full capacity.However, once the economy reaches at full employment, it means there is no spare capacity. Therefore, any further increase in aggregate demand might cause prices to rise and the eventual creation of excess demand will lead to demand-pull inflation.d)Apart from unemployment and the exchange rate, there are more factors influencing changes in the rate of inflation. For example, a monetary and fiscal policy and a prices and incomes policy are available to the governments and policy makers in order to control inflation.Monetary policy and fiscal policy can influence aggregate demand. When the aggregate demand curve or the aggregate supply curve shifts, there are fluctuations in the economys overall output of goods and services and its overall level of prices is also changed. Therefore, a change of these policies can lead to short-run fluctuations in output and prices.A government and policy makers can change interest rates to adjust to balance the supply and demand for money. Furthermore, targeting a certain level of the money supply can be also treated as monetary policy. Therefore, setting interest rates and money supply will be different between in the case of deman d-pull inflation and in the case of cost-push inflation. For instance, deflationary monetary policy such as raising interest rates and reducing banking lending might be introduced when demand-pull inflation occurs. However, against cost-push inflation, an expansionary monetary policy such as lowering interest rates might be adopted instead of a restrictionary monetary policy. The rationale behind this is that firms costs can be decreased through an expansionary monetary policy.Consequently, monetary policy can be described either in terms of the money supply or in terms of the interest rate. If monetary policy aims to expand aggregate demand, increasing the money supply or lowering the interest rate is adopted. However, changes in monetary policy that aim to contract aggregate demand can be described either as reducing the money supply or as raising the interest rate.The government is able to affect inflation not only with monetary policy but also with fiscal policy. Mankiw and Tayl or (2006 p.721) tells us, fiscal policy refers to the governments choices regarding the overall level of government purchases or taxes. Through the change of the level of the taxes, a government can in right off shift the aggregate demand curve by influencing the spending decisions of firms and households. However, contrary to this, the aggregate demand curve can be moved directly when a government changes its own purchases of goods and services. Therefore, fiscal policy might be different in accordance with various causes and different levels of economic activity.Against demand-pull inflation, a government is able to adopt deflationary fiscal policy involving increasing taxation and/or reducing government expenditure. Fiscal policy will indirectly reduce aggregate demand. For example, consumers might lower their spending and firms might reduce investment if a government raises income and corporation tax. By contrast, government expenditure can directly influence aggregate demand. T herefore, deflationary fiscal policy will have a downward multiplier effect and might be able to remove an inflationary gap. The graph below shows that reduced government spending (from G to G1) removes the inflationary gap of AB.(adopted from Grant p.573)Contrary to the case of demand-pull inflation, different fiscal policy will be also employed to combat cost-push inflation. According to Grant (2000), reducing corporation tax, decreasing indirect tax and cutting income tax are a fiscal approach to cope with cost-push inflation. Through those policies, a government can reduce firms costs or lower wage claims and then will influence aggregate demand.Moreover, monetary inflation will be expected, a government can adopt lowering expenditure by more than tax revenue as its fiscal policy.The discussion of fiscal policy has stressed how changes in government expenditure and changes in taxes influence the quality of goods and services demanded. Fiscal policy works primarily through aggreg ate demand in the short-run. However, in the long-run, it is also able to affect the quantity of goods and services supplied.Apart from monetary policy and fiscal policy, incomes policies and price controls can also influence changes in inflation.The incomes policy introduced to reduce inflation. Grant (2000) states it is to connect the growth of incomes to the growth of productivity in order to prevent the excessive rises in factor incomes. The incomes policy largely concentrates on wages even though there are many different forms of income such as wages, interest and profits. The rationale behind this is that wages form about two thirds of total costs. Governments are therefore able to control inflation by setting a percentage limit or a flat rate limit. Setting a percentage limit of wages will be useful to maintain wage differentials. Therefore, people in the high-income brackets might be beneficial as a result of a percentage limit. However, the lower brackets of income might be favourable to a flat rate limit because it reduces differentials. Consequently, the incomes policy will be helpful to maintain a wage and price still in the short-run. However, if exceptions are allowed too much or trade unions are strongly opposing the policy, it will be difficult to manage the tone of inflation.Price controls is also employed to restrict price increases. However, contrary to the incomes policy, price controls deals with the symptom of inflation rather than causes. For example, governments limit prices of products to control inflation rate if there is high inflation. Therefore, when inflation will be expected or is already happened governments and policy makers are able to choose price controls to restrict price increases and restore its symptom directly. However, if price controls continues, there will be some problems e.g. distorting the allocation of resources. The reason is that price controls can lead to shortages and create a demand for s system of rationin g.In conclusion, governments might try to restrict price increases and to limit pay settlements in order to reduce inflationary pressure. However, introducing the incomes policy and price controls has not only the effectiveness but also problems. Although they are separate policy, those policies can be used together. Furthermore, they might have an effect on the problem of cost-push inflation if they are employed together. Therefore, the incomes policy and price controls will be more effective when those policies are employed together. However, they might be inefficient in the long-run. The reason is that incomes policy and price controls can distort the market economy e.g. creating labour shortages. BibliographyGrant, S.J., 2000, STANLAKES INTRODUCTORY ECONOMICS, Essex, Longman Mankiw, N.G. and Taylor, M.P., 2006, Economics, London, Thomson LearningMarcouse, I., Wall, N., Lines, D. and Martin, B., 2003, Complete A-Z Economics Business Studies, London, Hodder ArnoldPowell, R., 2005 , AQA advanced Economics, Oxfordshire, Philip Allan UpdatesSungsoo Noh