Question 7 (1 Viewer)

leisl1990

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when i was doing the question i thought the question must be wrong.
this question is soooooooo odd, never seen anything like this.
coz from my knownlege, unemplomeny can noy be lower than natural unemployment rate.
so i just put A.

and then i had a thought after the exam?

is that very likely that expansionary policy would increase participation rate and the total number of unemploymed will therefore increase? and unemployment rate will rise.

but it depends on if these people have the right skill though,
 

daniellekho

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he's right. they might accept both...but i rekon c is most likely and the expected answer but with the possibility of a , they might accept it too.
 

leisl1990

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domf22 said:
The answer is C. whoever put A or anything else is wrong. because it states INTIAL impact... hidden unemployment wouldn't come out initially bcos it will take one or two quarters of strong positive economic growth before they realised and decide to look for work. therefore in the short run it will have a downward impact on employment and increase prices.
i disagree. if the economy is at its natural rate of unemployment, the economy must be growing pretty strongly. therefore there must be a consistent trend of increasing participation rate.. Expansionary policy would even encourage more people to join the labour force.

and dont be so cynical..
 
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Terlob

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karnage said:
Lol this thread turned into 10 pages discussing 1 mark.
Lol I know aye... Hopefully the Board of Studies looks at this forum. Id be happy if they accepted both.
 

runnable

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daniellekho said:
he's right. they might accept both...but i rekon c is most likely and the expected answer but with the possibility of a , they might accept it too.
I think otherwise. The NAIRU and rising participation rates are much more in the syllabus than short/long $#@#@ Philips curve nonsense. The syllabus doesn't even mention philips curve.
 

runnable

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karnage said:
Lol this thread turned into 10 pages discussing 1 mark.

Yea we love it. Theres nothing else that requires our attention like this in the test.
 

shakky15

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what about frictional unemployment? that could go down as it becomes easier to get a job when demand rises.
 

runnable

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But seeing how Australia's underutilisation rate is around 10%, I say there are damn a lot more discouraged job seekers than frictional workers. Frictional unemployed guys are never long term unemployed. They will lose a job, find a job constantly, hence frictional, not structural or long term. Thus it does not relate to growth that much. It only marginally helps those frictionals who happened to be frictional during that time.
 

Garygaz

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Some of the questions from this exam really make me question the intelligence of the markers. Why would they put a question like this into the exam? Looking at the ambiguous wording of the question obviously would lead to different interpretations...
 

shakky15

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runnable said:
But seeing how Australia's underutilisation rate is around 10%, I say there are damn a lot more discouraged job seekers than frictional workers. Frictional unemployed guys are never long term unemployed. They will lose a job, find a job constantly, hence frictional, not structural or long term. Thus it does not relate to growth that much. It only marginally helps those frictionals who happened to be frictional during that time.
well initially, those who are frictionally unemployed will get jobs quicker to satisfy supply shortfalls. frictionally unemployed people are part of the unemployment rate, hence when they get jobs it directly influences the unemployment rate. i still think that hidden unemployed people will not initially decide to look for jobs. usually confidence starts to increase after a few weeks, if not months, and thats when you might start seeing them actively seeking jobs and adding to the unemployment rate.
 

shakky15

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Garygaz said:
Some of the questions from this exam really make me question the intelligence of the markers. Why would they put a question like this into the exam? Looking at the ambiguous wording of the question obviously would lead to different interpretations...
i agree.

look tbh, if after all they pay A, i can see why. it makes sense. im not disputing your reasoning, runnable. its just that I see C as the more correct answer.. however if you end up right, theres no hard feelings :)
 

lilley.matthew

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runnable said:
I think otherwise. The NAIRU and rising participation rates are much more in the syllabus than short/long $#@#@ Philips curve nonsense. The syllabus doesn't even mention philips curve.
Of course with the syllabus it can be hard to say what is in it. However, the expectations-augmented Phillips curve is an integral part of the theory of the Natural Rate of Unemployment and NAIRU; it in truth explains why the NAIRU exists. Ergo i would believe that it should be covered under what the syllabus terms the 'natural rate of unemployment.' The fact that plenty of other people learnt about it as well suggests their teachers believed it was in the syllabus too. Bad luck to those who didn't learn about it; seeing it's what the question tests.

With regards to the actual question, a few thoughts. If anyone is still claiming that the economy cannot go beyond the NAIRU (i would have thought the name 'NAIRU' would have given this away), Australia is definately past it at the moment. And has been for the best part of 2 years. Admittedly it is a figure that is effectively impossible to calculate exactly- but treasury believes it is around 4.7%. Which makes sense because in the past several years, when currency appreciation should have sheltered us from inflationary pressures, inflation has been quite high. Although the Credit Crunch has undoubtedly affected the numbers, around budget 08 time treasury was pointing to inflation slowing and unemployment rising to around 5%, at which point the labour market would stop exacerbating inflation. Thus, as any extended Phillips curve will tell you, economies can temporarily (and in our case a year or two because AD has been so strong- but in economic terms 1-2yrs pretty much is short term) go below the NAIRU, because as that smart uni guy said cyclical unemployment effectively becomes negative.

With regards to the arguement about hidden unemployment and rising participation rates- nice idea but wrong for several reasons which can be noted when extrapolating the theory.

  • If hidden unemployment reduces sharply following AD stimulation at the NAIRU, and participation increases, and over however long these people flow into jobs, why would inflation increase? Inflation due to the labour market will only occur due to a tightening market. By a continuation of logic, if inflation doesn't rise, the economy can't really be at the NAIRU in the first place. And the NAIRU becomes a meaningless concept.
  • Increases in labour participation don't neccessarily lead to increased unemployment, even initially. Remember that calculations are done monthly, unemployed people are only counted once they apply for centrelink etc. I.e. many new entrants are never recorded as unemployed. Statistically, in 2006-07 the RBA has recorded 11 individual increases in participation rate. 3 led to higher unemployment, 3 to lower unemployment, the rest had unchanged unemployment. In other words, the assumption that U will increase as labour participation rises is hardly true in pratice.
  • Based on basic economic theory, it can be fairly safely assumed that the hidden unemployed fall into two categories- really hardcore unemployed- no applicable skills (effectively structurally unemployed) and the people who are merely 'fed up'- they have skills but have given up on finding work. As U falls towards the NAIRU, this latter group are the ones who will drive up participation by seeking employment- because higher AD is a positive signal for them. By the time the economy reaches the NAIRU, they will logically all have joined the labour force. By contrast, further AD stimulation will be little incentive to the hardcore type- if they have no skills they are highly unlikely to search for jobs; or any change in labour participation will at least be much slower.
  • Presuming that the Australian economy is below the NAIRU, there is only one way of getting below- AD stimulation. Unemployment is not going to fall for any other reason. For U< NAIRU, unemployment must be able to reduce in pratice at a point when it is at the NAIRU. If hidden unemployment reduces so much that U bounces back up as AD increases, this will never happen. Which taking what we know to be correct, this is obviously a paradox.
Thus C.

As a final note- people were saying to ask teachers. Mine says C as well.
And for the record, just because you don't get a particular theory, it doesn't mean that its 'nonsense'.
 

runnable

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Australia is not under its NAIRU. It has been admitted that the NAIRU has be mis-estimated.

There are many causes of inflation due to economic growth. Cost-push due to labour costs is just one of them. eg Economic growth is at 10%, no rise in participation rate or productivity can be enough to produce enough for this kind of growth thus causing to demand pull inflation. How can you assume that cost-push was the sole contributor to the increase of prices in the question?

The question was hardly asking whats happening in the actual process of government calculation of the unemployment rate. How can you claim that unemployment does not rise... because the government did not count it?

Your third point is not true. Why would discouraged job seekers have already got a job before NAIRU? Before NAIRU, usual cyclical people will benefit due to rise in aggregate demand, but at NAIRU, a rise in aggregate demand cannot attract cyclical unemployed because there is none, thus this is when discouraged job seekers come out.

Thus A.

Just because philips curve is not part of the syllabus, not mentioned at all. I reckon NAIRU and Causes of Unemployment are more relevant.
 

shakky15

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lol at lilley.matthew, you have some good arguments there, and i agree that the answer is C

but i will LOL so hard if in the end BOS pays A; truly pwned in that case lol.

i stand by my frictional case.
 

runnable

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shakky15 said:
i agree.

look tbh, if after all they pay A, i can see why. it makes sense. im not disputing your reasoning, runnable. its just that I see C as the more correct answer.. however if you end up right, theres no hard feelings :)

Of course there won't be hard feelings :).

Anyway regarding your frictional case. Australia has an estimated 1.3 million hidden unemployed individuals. Would suspect that outnumbers frictional many times.

Read my reply to matthew's case. I reckon most of it is wishful thinking.
 

shakky15

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runnable said:
Of course there won't be hard feelings :).

Anyway regarding your frictional case. Australia has an estimated 1.3 million hidden unemployed individuals. Would suspect that outnumbers frictional many times.
well i still assume that those 1.3 million (or even some of them), will not initially seek employment - there would need to be an obvious trend towards growth that would encourage them. frictionally unemployed people are ready to go - they just need a job to move into - easily attainable if demand for labour skyrockets.
 

runnable

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shakky15 said:
well i still assume that those 1.3 million (or even some of them), will not initially seek employment - there would need to be an obvious trend towards growth that would encourage them. frictionally unemployed people are ready to go - they just need a job to move into - easily attainable if demand for labour skyrockets.
Even if 10% of hidden unemployed seeks jobs, that would already offset more than enough frictional.
 

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