Econ Last Word Homework

1) Weigh the two arguments regarding unemployment in Europe. Is unemployment high because of high natural rates of unemployment or because of deficient aggregate demand?

Unemployment is high because of the high social security and the care that the unemployed receive from the government. The workers have large benefits that they receive from the government in the event that they become unemployed, so they aren't all that worried about being unemployed which leads to a relatively lower average of overall motivation, which would lead to more workers being fired. Also, the high wages that companies must pay dictate that the number of workers they hire will be lower because they cannot afford to hire as many. However, the government doesn't want to increase inflation, so therefore it doesn't increase government spending, which doesn't shift the aggregate demand curve outwards, which won't increase employment. So, this shows that it is not solely the fault of social intervention by the government but also the inability of the government to combat unemployment by increasing aggregate demand.

2) Explain the experience of the US between 1996 and 2000 when the economy was at greater than full employment with high GDP growth while maintaining low levels of inflation. What allowed this so-called "New Economy" to occur, and what brought it to an end in 2001?

The U.S was able to maintain this level of high growth because of increased aggregate demand and of increased aggregate supply. The resulting shift outwards in both aggregate supply and demand had the effect of increasing the real GDP while at the same time keeping inflation low through the aggregate demand shifting the real GDP up but at the same time increasing inflation, and then aggregate supply further increasing real GDP while decreasing inflation at the same time. The U.S had greater than full employment because the aggregate demand curve was already on the vertically sloping part of the aggregate supply curve. What brought this increase in growth to an end could be a decrease in any of the determinants of aggregate demand, however with the onset of the war in Iraq and therefore the increased government spending, this seems unlikely. Therefore a decrease in aggregate supply must have occurred, perhaps through the firms finally having to layoff workers because of the increased cost of hiring workers due to the short supply of workers perhaps further exacerbated by the people in the army having to leave part time jobs to go fight in Iraq.