Econ Midterm Questions

Chapter 16, Question 5

"This type of unemployment is beneficial because it encourages people to seek out the jobs for which they are best suited, while giving companies the option to find the best employees. Without frictional unemployment, people would stay in the same jobs for life, creating a very static system which would tend to suppress innovation, and make it difficult for companies to seek out new employees who could provide useful skills and ideas in the workplace." (http://www.wisegeek.com/what-is-frictional-unemployment.htm)

Frictional unemployment is inevitable as people move around in the market. People get laid off, look for better employment opportunities, experience stop gaps between jobs or graduate from college awaiting the right job. "Unemployment that is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information." (http://www.investopedia.com/terms/f/frictionalunemployment.asp#ixzz1fDv1Q2yi)

"The natural rate of unemployment has come to represent several ideas to economists. First it is often defined as that level of unemployment where prices and wage decisions are consistent- a level at which the actual inflation rate is equal to people's inflationary expectations. Natural unemployment is also considered to be the unemployment level where unemployment is only frictional, structural, or cyclical unemployment is zero. (Stone 444)

Laborers find their level in the workplace. They move on to other jobs that pay more for their skills. This allows companies to evolve their quality workforce and stay competitive in the marketplace. It also adjusts the standard of living and allows for an efficient more productive workforce. "A growing labor force is important for economic growth, and the productivity of that workforce is even more important...the demand for labor and the equilibrium real wage is determined by the marginal productivity of labor. (Stone 461) Productivity growth raises wages and incomes. (Stone 462)

Chapter 16, Question 6

"Hyperinflation is an extremely high rate of inflation....The causes of hyperinflation are usually an excess of government spending over tax revenues (extremely high deficits) coupled with the printing of money to finance these deficits. ..Eventually the monetary system breaks down and barter takes over. People no longer trust the money, so they are unwilling to accept it in exchange for goods or services. ..Inflation is one important measure of the health of an economy. (Stone 436)

"An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation. According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. The second is a commitment to bring the government's budget into balance. This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation. If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future." (http://www.econlib.org/library/Enc/Hyperinflation.html)

"Stopping hyperinflation requires restoring confidence in the government's ability