Question

QUESTION 1
a. Explain the natural rate of unemployment. (3 marks)
b. Discuss in detail any two government policies that can reduce the natural rate of unemployment? In your answer, you need to explain how these policies address the underlying causes of the natural rate of unemployment. (7 marks)

Answer 1

a) The natural rate of unemployment is the sum of frictional and structural unemployment that persists in an economy even when the economy is at potential and the labor and resource markets are at equilibrium . Now frictional unemployment is job search unemployment , structural unemployment occurs due to changes in technology or organization or work structure .

b) To reduce natural rate of unemployment government cannot just merely focus on money supply which is a cure for unemployment caused by business cycles . Firstly , to reduce frictional unemployment government has to create more jobs by setting up public sector enterprises . This policy increases job supply and thus reduces the time required for a job search . Secondly , the government can invest in training and education to update workers for modern technology . As for example computer training to workers who do not know computers can help them hold on to their jobs during structural unemployment .