Exam 14: The Labor Market in the Macroeconomy

It is well known that Henry Ford's payment of his workers of five dollars a day was higher than his competitor for a short while. Why did Ford do this and what were the advantages to him of doing so? What wage theory does this appear to be in accord with?

-Using the above graph, what is the equilibrium wage and the equilibrium number of workers that will be employed?

Differentiate between frictional unemployment, structural unemployment, and cyclical unemployment.

-The graph above plots unemployment rates and inflations rates from the time period between 1970 and 2009. What does this empirical evidence seem to suggest about the Phillips curve?

Graphically illustrate and describe the principle of sticky wages. What are some causes of inflexible or sticky wages?

Why do Classical economists believe that the labor market always clears?

Explain what the Phillips curve represents.

What is potential GDP?

-Using the above graph, how does an unemployment rate of U₁ compare to the natural rate of unemployment?

If the AS curve shifts from year to year, but the AD curve does not, then what kind of relationship would we expect between inflation and unemployment?

-Using the graph above, provide three reasons why a firm might be willing to offer a wage rate above $10.

What was the nature of the doubts about the Phillips curve during the 1970s?

-If the Phillips curve is vertical in the long run, what can be said about the trade-off between inflation and unemployment? What impact does your answer have on the government's expansionary fiscal policy effort to reduce unemployment?

What explanations do those economists who do not hold the classical view of the labor market offer for the existence of unemployment?

Figure 29.1 -Using Figure 29.1 explain what is happening when the unemployment rate is exactly equal to NAIRU.

Why do the Classical economists argue that excessive unemployment won't persist in an economy for very long?

Explain the relative-wage explanation of unemployment.

Why was the Phillips Curve relatively stable during most of the 1950s and 1960s?

Explain efficiency wage theory.

Assume an economy where unemployment has been falling, but the price level has increased very little. What is the most likely explanation for this phenomenon? Explain in terms of the aggregate supply curve.