Exam 14: The Labor Market in the Macroeconomy

-Under what circumstance will the economy experience both inflation and unemployment? Explain in terms of shifts of the aggregate supply and/or aggregate demand curves. Under what circumstances might the impact on inflation be even worse?

Explain the sequence of events that will unfold when there is a decrease in aggregate demand while the economy is operating in the upward-sloping section of the aggregate supply curve. Make sure to include in your assessment the impact on the price level, inventories, output and employment.

Using a labor supply and demand curve demonstrate the effect of a decline in the demand for labor assuming wages are "sticky" in a downward direction.

What is the social contract explanation for the existence of downwardly sticky wages? Why do you suppose that firms and workers behave this way?

What do economists mean when they refer to "sticky wages?"

Draw the shape of the long-run Phillips Curve.

How do changes in expectations cause the Phillips Curve to be unstable?

If firms start offering more employment benefits, such as more stock options, and a better dental plan, how will this affect the labor market?

What are explicit contracts?

What does the social contract explanation for sticky wages focus on?

List several potential benefits firms receive from paying efficiency wages which empirical studies have revealed.

Explain how the value that people place on the time they spend on nonmarket activities affects their decisions with respect to participation in the labor force.

Discuss the relative-wage explanation of unemployment.

Figure 29.1 -Using Figure 29.1 explain what is happening to the left of NAIRU.

-Using the above graph, if the labor demand curve were to shift to the left as depicted and wages are sticky what will be the result in the labor market?

Show with the use of a graph why minimum wage laws can cause unemployment.

Draw a graph of a long-run Phillips curve. What does this graph imply about the long-run trade-off between inflation and unemployment? What does this graph imply about the effectiveness of monetary and fiscal policy in the long run?

-Use the above graph to answer the following question. Suppose the economy is at Point C, what could possibly move the economy to Point D?

-Using the figure above, explain what would happen if the unemployment rate decreases from the NAIRU to U₁ and stays at U₁ for many periods. Assume that the inflation rate at the NAIRU was 4%.

During the 1960s, the Phillips curve relationship was relatively stable. During the 1970s, the Phillips curve relationship was unstable. Based on your understanding of the aggregate supply and aggregate demand model, explain why this was so.