Question Essay Example

Economic Theory Questions

Question 1

The ultimate focus of this section is to affirm or dispute if structural unemployment is something macroeconomic policy makers should be concerned about the same. Secondly, is to establish the difference between the same and cyclical unemployment. To show if it should be a concern or not to macroeconomic policy makers, how the term is conceptualised becomes important. Layton, Robinson & Tucker (2012, p.328) conceptualises structural unemployment as the ‘long-term or possibly permanent unemployment resulting from non-existence of jobs for some unemployed people’. The cause of all this mismatch is based on the fact that the skills posed by the unemployed individual does not match or has ceased to be relevant to the economy as result of changing taste, technology, taxes and competition. For instance, golf caddies have been replaced by carts (McEachern, 2009, p.174).

Since macroeconomists deals with the whole economy, this should be a concern to policy makers since it shows the mismatch between the skills in the economy and existing job opportunities. This should then form a wakeup call to policy formulators to re-align training offered in various academic institutions with the market demand. The integral role of macroeconomists is on projection of future growth areas that require investment through human resource training. The concern, that should be addressed by policy makers lies on the rationale that someone who is structurally unemployed has to develop new skills or search elsewhere (p.174). To overcome the challenge it calls for public and private entities to retrain their employees. Moreover, this is the difficult bit as it requires government intervention. Since the Australian government has unemployment benefits this becomes burden to the taxpayers (Layton, Robinson & Tucker, 2012, p.328).

The difference between structural unemployment and cyclical unemployment stems from the fact that cyclical unemployment is tied to output/ demand. As the output shrinks as result of decrease in demand companies are likely to cut down on the resources including labour. This results to unemployment (McEachern, 2009, p.174). Thus, this is the lack of job opportunity as result of changing business cycle which is reliant on the performance of the economy (Layton, Robinson & Tucker, 2012, p.328 &329).

Question 2

The question seeks to answer if Visa credit card, a dollar note, cats and beer mug can potentially serve as money. For visa credit card, Layton, Robinson & Tucker (2012, p.378) notes that it’s not a legal tender in itself, but a guarantee provided by the credit company that payment will be availed at a later stage. This implies that it is the card statement and not the card itself that functions as the unit of account. Lastly, the card does not address the expectation of store of value since the card arrangement acts like a loan where one receives the products to day and pay for it later. Thus it can’t serve as money.

For a dollar note, it can serve as money since it meets the 3 functions of money outlined by Layton, Robinson & Tucker (2012, p.376 & 377). To act as a medium of exchange, money has to be widely accepted and curtail coincidence of wants. The same is applicable to Australian Dollar which accepted in the country and abroad and everyone will easily accept it. This contrast says with something like cowry shell which might to be widely accepted. Equally it can be used for value comparison and thus, addressing critical bit of unit of account. Finally, the dollar can be used to hold value over a period of time as compared to other means of exchange like perishable goods.

For cats, it can’t be used as money. The first rationale is based on the fact that it can’t be used as store of value because as living thing, it can die and it’s equally prone to bad health. Moreover, the weight, age, colour and so on of cats differ. Secondly, it can’t function as unit of account or a common denominator of establishing value because it varies over time. Lastly, while it can act as medium of exchange, wide acceptability might be a problem and thus, would not qualify as money owing to the fact that cats have varying parameters.

Various arguments outlined above can be extended to beer mug. For instance, would the beer mug be widely accepted? The answer is no as result of various parameters and valuation techniques and thus, the problem of coincidence in transaction would arise yet this is what money should overcome. Equally, excluding the case of inflation, mug can’t work as store of value so that one can align his future expenses with current saving because mug can be physically destroyed and loose value is not the case to a dollar.

Question 3

The policy prescription of a supply-side economist if the economy were experiencing high and increasing inflation as well as higher than desired levels of unemployment lies on interbank exchange rates and treasury bills/ bonds. Investopedia (2009) observes that interest rates on interbank exchanges and treasury bills have a greater bearing on the economy. Interbank exchange rate is critical since it constitutes the amount federal bank/ central bank charges commercial banks. This charge is important in the control of inflation. For instance, when the rates are increased, it becomes expensive for the bank to borrow and this is consequently transferred to consumers. This would imply increased lending rates for loan like mortgages. The ultimate effect on the larger economy is that the disposable money will reduce as result of products become expensive. Thus, the whole business cycle is affected.

The underpinning policy is the expansionary monetary policy where it can lower interest rates so as to make economy grow faster or if the economy grows faster they can trigger inflation (Amadeo, 2013). For instance, to resuscitate the economy and improve market functioning after 2007-09 crisis, federal funds rate was lowered to all time low 0.25% in 2008. This was through measures like large scale asset purchase (Gilchrist and Zakrajsek, 2012, p.2). In a nutshell, an increase in the rate of risk free rate translates to higher risk premiums. This consequently affects the discount rates. Thus, in overall view, interest rate has a multifaceted implication on the economy. When the rate moves up, the overall effect is that the amount of money in circulation is reduced so as to check inflation. Additionally, this makes borrowing money difficult and thus, restrains the spending of individuals and businesses. Moreover, it shoots up the expense cost of companies and thus, reduces their earnings. Lastly, the increase makes investment in stock market unattractive option (Investopedia, 2012).

References

Amadeo, K 2013, The Federal Reserve System and its function, Viewed 2nd August 2013 from http://useconomy.about.com/od/governmentagencies/p/fed.htm.

Gilchrist, S., & Zakrajšek, E. 2012, The Impact of the Federal Reserve’s Large-Scale Asset Purchase Programs on Default Risk.

Investopedia 2012, How interest rates affect the stock market, Viewed 2nd August 2013 from http://www.investopedia.com/articles/06/interestaffectsmarket.asp.

Layton, P., Robinson, J & Tucker, B 2012, Economics for today, SOUTH Melbourne, Victoria Australia, Cengage Learning.

McEachern, W 2009, Macroeconomics: A contemporary introduction, Mason, OH: Cengage Learning.