1. As we’ve learned, a third m
1. As we’ve learned, a third market – the Labor Market –typically does not reach an equilibrium where supply of laborequals demand for labor. What do we call the “normal” unemploymentrate that persists even when wages have [incompletely]adjusted?
2. Say that businesses in the economy collectively think thatthe markets in which they sell their goods will soon experienceincreasing demand. In the loanable funds market, (a) which curve(s)do you expect to be affected, and (b) which direction(s) wouldthose curves shift?
3. Say that the government reduces the taxes it collects as apercent of interest income. In the loanable funds market, (a) whichcurve(s) do you expect to be affected, and (b) which direction(s)would those curves shift?
Answer:
Question 1
Equilibrium in labor market indicatethat at prevailing equilibrium wage, quantity demanded of laborequals the quantity supplied of labor.
However, this does not indicate thatunemployment is zero because many people would still be betweenjobs or may be searching for better opportunities and thus arefrictionally unemployed.
Technological change may also beerndering some people structurally unemployed.
So, at labor market equilibrium,frictional and structural unemployment remains.
Sum of these two is called thenatural rate of unemployment.
So,
The “normal” unemploymentrate that persists even when wages have adjusted is called thenatural rate of unemployment.
Question 2
If businesses anticipate that therewill be increase in demand for goods they sell in near future thenthey will expand their production facilities to enhance theirability to produce more to fullfil the increased demand in nearfuture.
This will induce firms to borrowmore to finance the stated expansion.
As firms will increase borrowing,demand for loanable funds will increase.
So,
In the market for loanablefunds, demand curve for loanable funds will shift to theright.
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