Answer to Question #209148 in Macroeconomics for Tom

Question

With its tradition of a job for life for most citizens, Japan once had a much lower

unemployment rate than that of the United States; from 1960 to 1995, the unemployment

rate in Japan exceeded 3% only once. However, since the crash of its stock market in

1989 and slow economic growth in the 1990s, the job-for-life system has broken down

and unemployment has risen to more than 5% in 2003. Explain the likely effect of these

changes in Japan on the Japanese natural rate of unemployment.

b). Assume all wage contracts are indexed to inflation in Pakistan where each month

wages are adjusted to reveal increases in the cost of living as reflected in changes in the

price level. In India wages are not adjusted to cost-of-living, but the labor unions are very

powerful and negotiate yearly contracts. Explain whether an expansionary monetary

policy is expected to have a larger outcome on aggregate output in Pakistan or in India?

Answer 1

Question a

The Impact of Japan's Natural Unemployment Rate

·A one-percentage-point increase in unemployment affects GDP by about two percent.

·Unemployment has criminal ramifications since property crime rates have risen dramatically.

·Greater unemployment leads to increased health problems, including depression.

·Both the state and federal governments raise unemployment payments when unemployment rises.

Question b

The expansionary monetary policy expands an economy's money supply. Increases in the money supply will lead to increased consumer spending, which will move the aggregate demand curve to the right, resulting in a higher impact on aggregate output for India than for Pakistan.