Question

1. If households expect a recession will come soon, will this increase the natural rate of unemployment? Explain.
2. A recession really occurs, but unemployment rate decreases. Explain how this can be possible.
3. The government makes it more difficult for companies to lay off their workers. However, unemployment rate increases as a result. Explain

Answer 1

Since natural rate of unemployment takes into account only frictional and structural unemployment and not cyclical unemployment, the anticipation of recession as business cycle will not increase natural rate of unemployment.

Recession occurs however unemployment decreases because government reacts fatser by stimulating economic growth and injecting liquidity which helps firms to hire more. Moreover, even central banks infuses money supply which helps lower unemployment as hiring activity kicks up.

The government makes more difficult for layoffs to takr place though unemployment rises at times since companies temporarily stop employment contracts and hire only when things are good making it hiring freeze and hence supply exceeds demand causing unemployment to rise. Moreover discouraged workers also rise causing unemployment to widen.

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