Exam 14: The Labor Market in the Macroeconomy

What is the labor supply curve?

Using the Classical view, draw a graph which illustrates the impact of a decline in the demand for labor on the wage rate and the equilibrium level of employment.

What is the short-run relationship between the unemployment rate and the price level?

What would be the definition that classical economists would use for unemployment?

-Using the above graph, suppose there is a decrease in the fertility rate and this causes some men and women to place a lower value on their time spent in non-market activities. How will this affect the labor market?

Define cyclical unemployment.

What is the short-run relationship between the unemployment rate and output?

Assume that the percentage of the labor force covered by labor contracts that set wages for a predetermined period of time increases. How will this impact the effectiveness of fiscal and monetary policy?

-Using the graph above, if a minimum wage of $12 is imposed on this labor market identify the quantity of labor supplied, the amount of labor actually hired, and the total level of unemployment.

How does the efficiency wage theory help explain the existence of unemployment?

Explain what the Phillips Curve shows.

-Using the above graph, if the wage rate is $12 what does the Classical view argue will happen in this labor market?

Suppose that empirical evidence demonstrated that at a 10% inflation rate the unemployment rate was 4% and that every 2% decline in the inflation rate translated into a 1% increase in the unemployment rate. Draw a graph showing this relationship. Place the inflation rate on the vertical axis.

What are cost-of-living adjustments?

Explain why Classical economists argue that the unemployment rate is not a very accurate indicator of whether the labor market is working properly.

Explain why in the case of a supply shock, the negative trade-off between inflation and unemployment does not hold.

Explain how inflationary expectations affect the Phillips curve. How do expectations of inflation affect the trade-off between inflation and unemployment?

-Using the above graph, if the labor demand curve were to shift to the left as depicted and firms enter into social, or implicit, contracts with workers not to cut wages what will be the wage rate and the level of employment.

The relationship between the inflation rate and the unemployment rate was stable during the 1960s. Why was it stable? The relationship between the inflation rate and the unemployment rate was not stable during the 1970s and 1980s. Why wasn't it stable?

Define what economists mean by the term NAIRU.