According to mankiw and taylor

consort to mankiw and taylora)According to Mankiw and Taylor (2006), un utilization means that inability to obtain a art when one is allowing and equal to work. Even though thither be several different ways to measure un interlocking, this toilet be normally measured in 2 ways the arrogateant count and the Labour Force subject field (LFS).Grant (2000) states that the claimant count is the traditional measure of unemployment in the UK. The lean of mountain mingled with the ages of 18 and 60 claiming unemployment benefit payments such as job seekers adaptation from the governance is counted as the claimant count. Therefore, it is relatively cheap and easy to gather entropy. However, m either economists believe that in that location ar some signifi flockt problems with the claimant count method beca purpose of the accuracy of this measure. Powell (2005p.290) tells us, the claimant count overstates true unemployment because many claimants be every not genuinely looking for work or not genuinely unemployed because they already learn undecl atomic number 18d jobs in the in leapal economy. In other words, some people who ar working in the black economy and who ar not looking for work are included in the claimant count. However, in other ways, it understates true unemployment. The rationale back tooth this is that the claimant count does not include unemployed people who are aged under 18 or over 60 or who do not claim unemployment benefits. Furthermore, some unemployed workers approaching retirement are in like manner removed from the register.The Labour Force Survey (LFS) is now recognised as the second measure of unemployment. According to Grant (2000), the LFS is excessively known as the ILO (International Labour Organisation) measure because it uses the ILOs definition of unemployment. Contrary to the claimant count, all people who are actively looking for a job in the last 4 weeks are counted as unemployed workers whether they are claim ing benefits or not. both(prenominal) the claimant count and the Labour Force Survey (LFS) have its own advantages and disadvantages. However, both measures qualification understate the positive unemployment. According to Powell (2005), the suit is that they do not count discouraged workers who have given up finding jobs and people who are assort as economically inactive.Unemployment fuel be defined and catego make growd in a number of types and ways. Therefore, in this paper, it allow be classified in accordance with its causes.First of all, at that place is chemical equilibrium unemployment. Grant (2000) tells us that equilibrium unemployment exists when the flux exact for labour is equal to the pith contributeing of labour and va lavatorycies match with the number unemployed. However, although thither is equilibrium at employ ordain, people expertness fluent unemployed because the va lavatorycies are uninformed to them or they are unaccept fitting or unintentio nal to take up the va outhousecies. The chartical record below shows equilibrium unemployment.( pick out from Powell p.293)This equilibrium unemployment is measured by the distance amongst Z and X or E1 EFE. In addition, ASLN hack shows all the workers who are willing to work at different strong earnings rolls. According to Grant (2000), there are different types of equilibrium unemployment such as frictional, search, casual, seasonal, structural, proficient and remnant unemployment.Frictional unemployment occurs where people are among jobs. Because of immobilities in the labour force, a delay or time-lag is created while unemployed workers move from one job to another. Therefore, it explains wherefore people are able to persuade unemployed despite there are job va chiffoniercies available. Powell (2005) states geographical and occupational immobilities of labour explain why unemployed workers are pr all the sameted from filling job vacancies immediately. For example, the cost of moving and difficulties of obtaining housing are among the causes of geographical immobility. In addition, occupational immobility is ca employ by the need for training and the effects of trapive practice and discrimination in labour markets.Grant (2000) says that search unemployment is a form of frictional unemployment. The newly unemployed workers who have expert lost their jobs or who have voluntarily left their jobs ability take a fissure in advance getting a new job. The flat coat is that they need to search labour markets to see better-paid or high(prenominal) status employment is available. Therefore, search unemployment takes emerge when unemployed workers do not accept the first job offer to search for better-paid or high status employment.Some kinds of unemployment occur when certain groups of workers are start of work amidst periods of employment. According to Grant (2000), casual unemployment, one of the specific cases of frictional unemployment, t akes place because of that reason above. In other words, casual unemployment occurs when workers are unemployed on a short-term basis in trades. For example, workers in the tourism sector, construction industry and agricultural work.Powell (20005) states that seasonal unemployment is casual unemployment and it occurs in some industries agony seasonal fluctuations in engage. Industries such as farming, tourism and building experience such seasonal patterns of supplicate. Therefore, yield pickers and deck chair attendants can be an example of seasonal unemployment.Besides, there is structural unemployment. People can be unemployed because of the changing structure of the economy. According to Powell (2005), structural unemployment a hooks from the structural decline of industries. For instance, if there are more efficient competitors in the market or there is the decline of demand, the workers in those industries will be becoming unemployed e.g. coal-miners in the UK. Further, he says that structural unemployment occurs when industries reassign their scientific discipline requirements. For example, industries ask new skill requirements when they form or introduce ways of producing their products.Structural unemployment has some different forms bid frictional unemployment. Technological, regional and international unemployment are forms of structural unemployment.Technological unemployment is a form of structural unemployment. Grant (2000) say that technical unemployment publications from the introduction of new technology such as labour-saving technology. Therefore, there will be automation as a result of introducing new technology. through automation, industries can reduce their demand for labour even though their output is exaggerateing. Accordingly, it can be defined technological unemployment results from those industries using labour-saving technology such as the use of telephone banking and plastic cards.Like technological unemployment, regional unemployment is also connected with structural unemployment. Grant (2000) states that regional unemployment takes place when the declining industry is linked to a specific area. In other words, it occurs because of the decline or stay of a major employer in a particular area. For example, in the UK, the decline of textile and shipbuilding created a pool of unemployed workers in some regions.According to Grant (2000), international unemployment is also a form of structural unemployment. It occurs when the demand for domestically produced goods and work falls and, consequently, there are extendd workers losing their jobs. For example, if there are more efficient competitors abroad, consumers competency choose goods and services that are produced out of the country. Therefore, the demand for domestically produced goods and services expertness decrease then firms will reduce their employees or will be closed.Finally, there is residual unemployment as a type of equilibrium unemploy ment. Mankiw and Taylor (2006) state that residual unemployment takes place when people are unwilling to work or are not able to work due to disability. Basically, people who are unemployable on a permanent basis cannot meet the demands of modern production methods and the disciplines. Therefore, it can take place in all societies.Disequilibrium unemployment is another kind of unemployment except for equilibrium unemployment. According to Grant (2000), there are two conditions for occurring disequilibrium unemployment. One is that the inwardness supply of labour must exceed the heart and soul demand for labour. other condition is that wages are sticky downwards (wage stickiness). The graph below shows that there is disequilibrium unemployment of LLZ at the wage cast W. ( fasten oned from Grant p.536)According to Powell (2005), there are two main types of disequilibrium unemployment classical or real-wage unemployment and cyclical, Keynesian or demand-deficient unemployment.Class ical unemployment or real-wage unemployment takes place when wages are fixed at a higher real rate rather than real-wage rate and labour market, caused by trade unions or a disposal-set nominal wage, prevents the real wage rate falling below these higher wages. The graph below shows classical or real-wage unemployment.(adopted from Powell p.297)If labour markets are sufficiently competitive, the market mechanism begins to reduce disequilibrium wage rate to eliminate the over oftentimes supply of labour in the market. However, labour market rigidity or wage stickiness prevents the real wage rate falling below W1. Because of labour market rigidity or wage stickiness, there is the period of timeless supply of labour in the markets and, consequently, classical or real-wage unemployment persists.According to Powell (2005), demand-deficient unemployment (also known as cyclical unemployment or Keynesian unemployment) stems from leakages or withdrawals from the circular flow of income and from the negative multiplier factors that are then unleashed. In other words, an under- encompassing employment equilibrium occurs because of a continuing lack of effective aggregate demand. For example, the flow of income might fall by the size of the net leakage multiplied by the national income multiplier when mean leakage exceeds planned injections.Powell (2005) states that demand-deficient unemployment illustrate the paradox of thrift. It comes from the fact that saving becomes a vice at the aggregate level if people rescue and others are prohibited from spending the saving. For instance, demand for goods and service reduces when the market is in the recession of business roulette wheel below the trend. Therefore, firms do not need to produce many goods to satisfy decreased consumers demand so that less labour is needed. The demoralise the demand for goods and services, the less the demand for labour is needed. Consequently, firms will reduce the number of their emplo yees then the unemployment will step-up.Powell (2005 p.299) tells us, Inflation is best defined as a persistent or continuous attire in the financial value level, or as a continuing fall in the jimmy of money. Like unemployment, there are some methods to measure fanfare the sell equipment casualty index (RPI), the PRIX, the RPIY and the consumer value index (CPI).The sell monetary value index (RPI) shows changes in the price of average persons shopping basket. According to Powell (2005), the RPI was used by UK political relation to measure changes in the rate of splashiness until 2003 and it measures the headline rate of splashiness. The RPI is based on a monthly survey of the prices of consumer goods and services and it is therefore, calculated through a weighted average of each(prenominal) months price changes. However, it is impossible to measure all prices. Therefore, the RPI contains 650 items as a representative sample and those items are on a regular basis chan ged to reflect new products and changing tastes. For instance, subscriptions for Internet service and digital cameras newly entered index compilation.The RPIX is the retail price index excluding owe interest payments. Powell (2005) says that the RPIX measures the underlying rate of swelling. In other words, it is measured by the radiation diagram the headline rate minus owe interest rates. The RPIX only includes the council tax while the RPI includes the council tax and the mortgage interest rate. Furthermore, it is used to measure the cost of living of a representative family in the economy as the CPI does. Marcouse et al (2003) tell us that the RPIY is similar to the RPIX. However, it excludes indirect taxes as well as the mortgage interest.The consumer price index covers the prices of consumer goods. It attempts to measure the cost of living of a representative family in the economy like the RPIX. The CPI includes investment goods and goods purchased by the government while t he mortgage interest rate and the council tax are excluded from the CPI. According to Powell (2005), in the UK, the CPI will replace the RPI and the RPIX completely because it is based on the method of measuring stick the price level used in the European Union.Inflation can be defined and classified in accordance with its causes. There are two different types of puffiness demand-pull and cost-push pompousness and those two types of ostentatiousness are classified by Keynesians.Demand-pull inflation is caused by too much demand in the economy. In other words, demand-pull inflation occurs when there is too much money chasing too few products. For example, oil and steel. According to Grant (2000), an increase in aggregate demand must rise real output and the price level once the countrys resources are fully employed. The graph below uses a short AD/AS diagram to show demand-pull inflation.(adopted from Powell p.306)When the government rises aggregate demand from AD1 to AD2, the gov ernment can eliminate demand-deficient unemployment and create full employment although real output and the price level increase. However, once full employment arrives, a set ahead increase of aggregate demand may cause an upward movement of aggregate demand, shifting the aggregate demand curve from AD2 to AD3 and then spare demand (the vertical distance between W and Z) is created. Although there are several different conditions causing demand-pull inflation, wartime might be an appropriate example.The graph above also illustrates an inflationary gap which is the vertical distance between W and Z. Powell (2005 p.306) tells us, An inflationary gap measures the extent to which excess demand exists at the full employment level of real income or output. Similarly, a deflationary gap measures the extent to which there is deficient aggregate demand.Cost-push inflation occurs as a result of a rise in the costs of production which are not caused by excess demand. Therefore, there is the difference between demand inflation and cost-push inflation. According to Powell (2005), cost theories of inflation are based on the cause of inflation in structural and institutional conditions on the supply side of the economy. Cost-push inflation is illustrated in the graph below.(adopted from Powell p.307)An increase in cost will cause a shift in the aggregate supply curve to the left (SRAS1 to SRAS2). The effect of this is to raise prices from P1 to P2 and then the quantity demanded will move from Y to Y1. Therefore, the macroeconomic equilibrium will be moved from X to Z and, consequently, the new macroeconomic equilibrium will be at point Z.According to Grant (2000), there are several causes in which costs might increase independently of the state of demand. First of all, wage push inflation can turn over to cost-push inflation where trade unions force wages levels to increase independently of the demand for labour. Another example is a rise in prices of imported materials. Finally, a rise in indirect taxation also gives an example which leads to cost-push inflation.b)(data for this graph adopted from the handout)The graph above shows changes in retail price change and unemployment between 1986 and 1995. It can be clearly seen that there is the relationship between the retail price % change and unemployment rate and those are reciprocally related.The retail price % change change magnitude from 3.4% to 9.5% between 1986 and 1990. During that period, the unemployment rate decreased from 11.2% to 5.9%. However, once, the retail price % change reduced from 9.5% to 5.9% in 1991, the changes in unemployment started to raise from 5.9% to 8.1%. Between 1991 and 1993, there was a decrease in retail price change from 5.9% to 1.6% while the unemployment rate increased from 8.1% to 10.4%. However, by 1994, the changes in unemployment reduced again (from 10.4% to 9.3%) when the changes in retail price change increased from 1.6% to 2.5%. In 1995, the unemployment rate still decreased while the retail price % change increased.The changes in retail price change was at the peak in 1990 when the unemployment rate recorded the lowest rate (5.9%) in the same year. In 1993, the changes in retail price change and unemployment are different. The retail price % change reached the lowest rate (1.6%) when the unemployment rate recorded the highest rate (10.4%) in 1993.Overall, there was a decrease in unemployment rate when the changes in retail price change increased. By contrast, the unemployment rate raised when the changes in retail price change decreased.In other words, the unemployment rate decreased at first, then increased and decreased again. However, contrary to the changes in unemployment, the changes in retail price change increased at first, then decreased and increased again during the same period. Therefore, the relationship between changes in retail price change and unemployment can be analysed that a stable relationship exists between th em and they are inversely related. The graph below shows an inverse relationship between retail price % change and unemployment at once.(data for this graph adopted from the handout)Moreover, we can notice unemployment is low when retail price % change is high and unemployment is high when retail price % change is low from the two graphs above. c)There are some facts which can be expect from the data and question b. First of all, there is an inverse relationship between inflation rate and unemployment. Therefore, we can expect when inflation rate is low, unemployment is high and, conversely, unemployment is low when inflation rate is high. From this negative association, we are able to expect that unemployment might be changed as a result of changes of inflation rate. It means that there are changes of inflation rate first then the changes of unemployment will happen. Apart from these two facts, the data show the changes regularly repeated. Accordingly, we can expect that inflation can be make a motioned by external factors and governments might be able to influence changes in the rate of inflation and unemployment through choosing their preferred cabal of unemployment and inflation.First of all, the relationship between inflation rate and unemployment can be explained by Philips curve analysis. According to Powell (2005), A. W. Philips argued that the inverse relationship existed between unemployment and the rate of price inflation. This relationship is illustrated by the Philips Curve as shown in the graph below.(adopted from Powell p.308)The Philips Curve above shows a negative association between unemployment rate and inflation rate. When there is high inflation, unemployment is low and when there is low inflation, unemployment is high.Moreover, Powell (2005) states that the Philips Curve suggests how the conflict between full employment and control of inflation can be dealt with. The reason is that the combinations of inflation and unemployment can be arisen in the short-run as shifts in the aggregate demand curve move the economy on the short-run aggregate supply curve. In the short-run, a rise in aggregate demand for goods and services leads to a greater output of goods and services and a higher price level. In other words, a lower rate of unemployment will be happened by expanding aggregate demand. Therefore, governments and indemnity makers not only move the economy from point A to point B however also reduce unemployment rate from U1 to U2. However, a higher rate of inflation is also happened (P1?P2). Accordingly, it means there is a trade off between falling unemployment and increasing inflation. Points such as A and B on the Philips Curve offers insurance makers a menu of possible outcomes and, consequently, governments might decide an acceptable combination between unemployment and inflation.According to Mankiw and Taylor (2006), Friedman and Phelps introduced expected inflation to help understand the short-run and lon g-run relationship between inflation and unemployment. Expected inflation measures how much people expect the overall price level to change. The graph below introduces the role of expectations into the inflationary process.(adopted from Powell p.311)In the graph above, we assume unemployment is initially at its natural rate (UN) and price inflation equals wage inflation. When a government pursues an expansionary monetary insurance policy to expand demand, the economy moves along Philips curve SRPC1 (from point A to Point B). At point B, unemployment is below its natural rate, but inflation rises to P1. Consequently, in the short-run, inflation rises above expected inflation and workers may suffer money illusion, the false view that an increase in money wage is also a real wage increase.However, a point such as B is unsustainable because people get used to this higher inflation rate and they increase their expectations of inflation. Firms and workers, therefore, consider higher in flation when setting wages and prices in order to specify the real wage. The short-run Philips curve, accordingly, shifts to the right (from SRPC1 to SRPC2). Consequently, the economy ends up at point C where there is higher inflation than at point A, but with the same level of unemployment.Powell (2005) says that once the economy reaches at point C, any come on expansion of aggregate demand moves the economy to point D and inflation rate of P2. The reason is that this touch will continue if there are higher expected rates of future inflation. Therefore, it gives explanations why unemployment rate regularly decreases then increases and why inflation rate is always positive. Furthermore, it also explains why the changes in inflation rate and unemployment are repeated. Apart from the Philips curve, Keynesian theories of inflation are also helpful to understand the facts which are found. The graph below shows an upward-sloping SRAS curve.(adopted from Powell p.279)According to Powel l (2005), Keynesians now believe the SRAS curve slopes upward and upward-sloping SRAS curve shows that an increase in the price level is necessary to persuade companies to supply more output. It, therefore, explains why unemployment is changed as a result of changes in the rate of inflation. A rise in the price level (from P1 to P2) reduces the real wage rate. Therefore, firms can employ more labour and supply more output and, consequently, unemployment will decrease to increase supply. Moreover, governments can inflate the price level and approach full employment through an increase in aggregate demand. The graph shows an increase in aggregate demand is reflationary or inflationary. It means that expansionary fiscal or monetary policy reflates real output and create jobs, and inflates the price level. Therefore, a rise in aggregate demand moves the economy towards full capacity and, consequently, the economy will be able to approach full employment and full capacity.However, once t he economy reaches at full employment, it means there is no spare capacity. Therefore, any further increase in aggregate demand might cause prices to rise and the eventual existence of excess demand will lead to demand-pull inflation.d)Apart from unemployment and the exchange rate, there are more factors influencing changes in the rate of inflation. For example, a monetary and fiscal policy and a prices and incomes policy are available to the governments and policy makers in order to control inflation.Monetary policy and fiscal policy can influence aggregate demand. When the aggregate demand curve or the aggregate supply curve shifts, there are fluctuations in the economys overall output of goods and services and its overall level of prices is also changed. Therefore, a change of these policies can lead to short-run fluctuations in output and prices.A government and policy makers can change interest rates to adjust to balance the supply and demand for money. Furthermore, targeting a certain level of the money supply can be also treated as monetary policy. Therefore, setting interest rates and money supply will be different between in the case of demand-pull inflation and in the case of cost-push inflation. For instance, deflationary monetary policy such as raising interest rates and reducing banking lending might be introduced when demand-pull inflation occurs. However, against cost-push inflation, an expansionary monetary policy such as lowering interest rates might be adopted instead of a restrictionary monetary policy. The rationale behind this is that firms costs can be decreased through an expansionary monetary policy.Consequently, monetary policy can be described either in terms of the money supply or in terms of the interest rate. If monetary policy aims to expand aggregate demand, increasing the money supply or lowering the interest rate is adopted. However, changes in monetary policy that aim to contract aggregate demand can be described either as re ducing the money supply or as raising the interest rate.The government is able to affect inflation not only with monetary policy but also with fiscal policy. Mankiw and Taylor (2006 p.721) tells us, financial policy refers to the governments choices regarding the overall level of government purchases or taxes. Through the change of the level of the taxes, a government can indirectly shift the aggregate demand curve by influencing the spending decisions of firms and households. However, contrary to this, the aggregate demand curve can be moved directly when a government changes its own purchases of goods and services. Therefore, fiscal policy might be different in accordance with various causes and different levels of economic activity.Against demand-pull inflation, a government is able to adopt deflationary fiscal policy involving increasing taxation and/or reducing government expenditure. Fiscal policy will indirectly reduce aggregate demand. For example, consumers might lower the ir spending and firms might reduce investment if a government raises income and corporation tax. By contrast, government expenditure can directly influence aggregate demand. Therefore, deflationary fiscal policy will have a downward multiplier effect and might be able to remove an inflationary gap. The graph below shows that reduced government spending (from G to G1) removes the inflationary gap of AB.(adopted from Grant p.573)Contrary to the case of demand-pull inflation, different fiscal policy will be also employed to combat cost-push inflation. According to Grant (2000), reducing corporation tax, decrease indirect tax and cutting income tax are a fiscal approach to cope with cost-push inflation. Through those policies, a government can reduce firms costs or lower wage claims and then will influence aggregate demand.Moreover, monetary inflation will be expected, a government can adopt lowering expenditure by more than tax revenue as its fiscal policy.The discussion of fiscal poli cy has stressed how changes in government expenditure and changes in taxes influence the quality of goods and services demanded. Fiscal policy works primarily through aggregate demand in the short-run. However, in the long-run, it is also able to affect the quantity of goods and services supplied.Apart from monetary policy and fiscal policy, incomes policies and price controls can also influence changes in inflation.The incomes policy introduced to reduce inflation. Grant (2000) states it is to connect the growth of incomes to the growth of productivity in order to prevent the excessive rises in factor incomes. The incomes policy largely concentrates on wages even though there are many different forms of income such as wages, interest and profits. The rationale behind this is that wages form about two thirds of total costs. Governments are therefore able to control inflation by setting a percentage limit or a flat rate limit. shot a percentage limit of wages will be useful to maint ain wage differentials. Therefore, people in the high-income brackets might be beneficial as a result of a percentage limit. However, the lower brackets of income might be favourable to a flat rate limit because it reduces differentials. Consequently, the incomes policy will be helpful to maintain a wage and price still in the short-run. However, if exceptions are allowed too much or trade unions are strongly opposing the policy, it will be difficult to manage the cubic yard of inflation.Price controls is also employed to restrict price increases. However, contrary to the incomes policy, price controls deals with the symptom of inflation rather than causes. For example, governments limit prices of products to control inflation rate if there is high inflation. Therefore, when inflation will be expected or is already happened governments and policy makers are able to choose price controls to restrict price increases and restore its symptom directly. However, if price controls continu es, there will be some problems e.g. distorting the allocation of resources. The reason is that price controls can lead to shortages and create a demand for s system of rationing.In conclusion, governments might try to restrict price increases and to limit pay settlements in order to reduce inflationary pressure. However, introducing the incomes policy and price controls has not only the effectiveness but also problems. Although they are separate policy, those policies can be used together. Furthermore, they might have an effect on the problem of cost-push inflation if they are employed together. Therefore, the incomes policy and price controls will be more effective when those policies are employed together. However, they might be inefficient in the long-run. The reason is that incomes policy and price controls can distort the market economy e.g. creating labour shortages. BibliographyGrant, S.J., 2000, STANLAKES INTRODUCTORY ECONOMICS, Essex, Longman Mankiw, N.G. and Taylor, M.P., 2006, Economics, London, Thomson LearningMarcouse, I., Wall, N., Lines, D. and Martin, B., 2003, exhaust A-Z Economics Business Studies, London, Hodder ArnoldPowell, R., 2005, AQA advanced Economics, Oxfordshire, Philip Allan UpdatesSungsoo Noh