Question

(b) If households expect a recession will come soon, will this increase the natural rate of unemployment? Explain.

(c) A recession really occurs, but unemployment rate decreases. Explain how this can be possible.

(d) The government makes it more difficult for companies to lay off their workers. However, unemployment rate increases as a result. Explain.

Answer 1

b. Yes, if the households expect that recession will occur in the economy sson then this will reduce the aggregate demand in the economy because of fall in the level of consumption in the economy and increase in the savings rate in the economy and as aggregate demand in the economy decreases, this will reduce production in the economy and as production decreases, demand for labor will also decrease which will increase the natural rate of unemployment in the economy.

c. During the time of recession, if the government follows expansionary fiscal policy, then this will lead to increase in the level of aggregate demand in the economy and thus unemployment rate in the economy falls because of increase in demand for labor as aggregate demand and production in the economy increases.

d. This is because as the government makes it more difficult for companies to lay off their workers, this will reduce the demand for labour in the labour market and as the demand for labor gets reduced, the employment level in the economy will reduce and this will lead to increase in the level of unemployment rate in the economy.