Alexandre Silva
Economics Homework 5. April, 2008
A.
i) Unemployment rate is the percentage of the total labour force that is unemployed but seeking employment and therefore, willing to work.
ii) The business cycle is the ups and downs of the general level of the economy. All modern and industrialized countries have fluctuations in their levels of economy, leading to the thought that one nation's economy is “booming” while another economy is in a recession and therefore, not all can be “booming” at the same time. When an economy goes from a positive to a negative rate of growth, it is said to have reached a "peak" and entered a recession. When an economy goes from a negative to a positive rate of growth, it is said to have reached a "trough" and entered a "recovery."
B.
In some economies there might exist a deflationary gap. This deflationary has to be closed so that the economy can progress. To understand what should be done to attempt closing the gap we have to understand what a deflationary gap is. A deflationary gap is when GDP is below its full-employment level and therefore the demand is insufficient for the existing supply. The way of approach to close the gap can be different depending on the government economic view. In monetarist government, nothing would be done since they believe the economy will correct itself and every demand-side policy that would be applied would only make it worse. Keynesians governments would act differently. They would defend that demand-side policies should be used to increase the demand. The demand-side policies can be of two different types, fiscal policies or monetary policies. Fiscal policies are policies that change the government spending (like the multiplier, which injects money in the circular flow) or reducing the taxes to make people have more money and therefore increase the demand. On the other hand, monetary policies would be effective as well. These policies are for example changing the money supplied for the society or the interest rates.
