Download Answers to Questions in Chapter 14

Answers to Questions in Chapter 15
Note: No. before  indicates a page number
Page
349  1. If the number unemployed exceeded the outflow in any period, what could we
conclude about the average duration of unemployment?
Nothing with any certainty. Because the new entrants to unemployment have not been
unemployed very long the average duration might fall. At the same time, however,
those already in the pool find it more difficult to escape and this will increase the
duration.
349  2. Make a list of the various inflows to and outflows from employment from and to (a)
unemployment; (b) outside the workforce.
Inflows to employment:
(a) From unemployment:
The two items in the bottom left corner of Figure 15.2.
(b) Outside the workforce:

School/college leavers.

Immigrants.

Returners to the labour force: e.g. parents after raising children.
Outflows from employment:
(a) To unemployment:
The three items in the top left corner of Figure 15.2.
(b) To outside the workforce:

People who retire.

People who are made redundant, who are sacked or who resign, and choose
not to look for a new job.

People who temporarily leave their jobs: e.g. to raise a family, or to attend
further or higher education

People who emigrate.

People who die.
350  Why have the costs to the government of unemployment benefits not been included as a
cost to the economy?
Because unemployment benefit is merely a transfer of money: from the taxpayer to the
unemployed. The monetary cost to the taxpayer is exactly offset by the benefit to the
unemployed.
352  If the higher consumer expenditure and higher wages subsequently led to higher prices,
1
Answers to questions in Economics by Sloman and Norris
what would happen to: (a) real wages; (b) unemployment (assuming no further
response from unions)?
(a) Real wages would fall back again: the wage rate would fall back towards We in
Figure 15.6.
(b) The lower real wages would cause consumer demand to fall and thus shift ADL
back to the left again. But unemployment would fall, because firms could afford to
employ more workers at the now lower real wage.
In other words, there is a movement back towards the original position of We and Qe.
353  (Box 15.1) Would the Singapore government have thought the unemployment was
disequilibrium or demand deficient in nature?
It is not really possible to tell, as the policy would work in either case. Were the
unemployment to be disequilibrium then reducing the employers’ contribution would
reduce the ‘real wage’ paid by employers. Such a policy might also solve demand
deficient unemployment. This is because cutting the contribution reduces the ‘real
wage’ paid by employers without reducing the real wage received by workers. Thus
there may not be any reduction in aggregate demand (see page 354). (In the long run, of
course, reducing contributions does lower the real wage received by workers as they
have less money in their CPF.)
354  If this analysis is correct, namely that a reduction in wages will reduce the aggregate
demand for goods, what assumption must we make about the relative proportions of
wages and profits that are spent (given that a reduction in wages will lead to a
corresponding increase in profits)?
That the proportion of profits that is spent is smaller than the proportion of wages that
is spent. Thus a redistribution from wages to profits will reduce total expenditure.
356  (Box 15.2) 1. In what areas of the economy are jobs growing most rapidly? Is this due
to a lack of technological innovation in these areas?
In the service sector. It is partly due to a lack of displacement of labour by machines,
but also due to a rapid rate of growth in demand. (Note that in some parts of the service
sector, there has been a displacement of labour as a result of the information
technology revolution.)
356  (Box 15.2) 2. Why have rural areas generally seen a smaller decline in high-tech
employment than urban areas, and in some cases have seen an increase?
Because high-tech firms increasingly are choosing to locate in low-cost out-of-town
sites. Given that transport costs are generally only a small proportion of the total costs
of these firms, it is not important for them to be located near to their market. (See also
Box 9.3 on page 304.)
359  1. Do you personally gain or lose from inflation? Why?
You will have to answer this for yourself! Whether you gain or lose will depend on (a)
whether your income tends to go ahead of, or fall behind inflation; (b) whether you are
a net borrower or saver, and whether the rate of interest is above or below the rate of
inflation (if it is below, then the real rate of interest is negative and thus borrowers will
2
Chapter 15
gain and savers will lose); (c) just how inconvenient you find it to update your
information on prices so that you can decide whether items are good value for money.
If you are in receipt of a student grant, you are probably a loser, given that grants have
not risen to compensate for inflation.
359  2. Make a list of those who are most likely to gain and those who are most likely to lose
from inflation.
Gainers: powerful companies; members of powerful unions; property owners (if
property is rising in value more rapidly than prices generally).
Losers: those on incomes fixed in money terms (e.g. savers living on interest on their
capital: the real value of their capital will be being eroded by inflation); workers with
no bargaining power; people on benefits, where these benefits do not rise in line with
prices; students.
370  How did the Australian dollar `fare' compared with the American dollar, the pound
and the yen from 1990 to 2000? What conclusions can be drawn about the
relative movements of these three currencies?
The Australian dollar depreciated against all three currencies, by 24% against the
American dollar, by 13% against the pound and by 47% against the yen. It follows that
the yen appreciated against the American dollar and the pound and that the American
dollar appreciated against the pound.
371  (Box 15.4) 1. What are the current and previous total weights of the South-East Asian
countries and China? Comment.
If we add the weights given to China, Singapore, Indonesia, Malaysia, Thailand and the
Philippines, we find that they summed to 9.97 in 1988 and to 18.88. As the weights
reflect country shares in Australia’s trade it means that the collective share of these
countries roughtly doubled in the period shown.
373  Go through each of the above reasons for shifts in the demand for and supply of dollars
and consider what would cause an appreciation of the dollar.

A lower rate of inflation in Australia than abroad.

A fall in Australian incomes relative to those abroad.

A rise in Australian interest rates relative to those abroad.

Better investment prospects in Australia than abroad.

Speculators believe that the rate of exchange will appreciate.

Australian goods become more competitive (in terms of quality, etc.) than
imported goods.
374  (Box 15.5) Assume that a Japanese firm wants to import nickel from Australia.
Describe how foreign exchange dealers will respond.
The firm will want to purchase dollars with yen. It will thus ask banks' foreign
exchange departments for a Y/$ quote. The dealers will thus be put in competition with
each other, trying to offer the lowest Y price for dollars in order to obtain the business.
But they must be careful not to offer so low a Y price that they will be unable to buy
3
Answers to questions in Economics by Sloman and Norris
the necessary dollars at an even lower Y price from Australian importers wanting yen.
375  What problems might arise if the government were to adopt this third method of
maintaining a fixed exchange rate?
It could invite retaliation from other countries, whereby they imposed restrictions on
Australian exports to them. By reducing the total amount of international trade, it
would reduce the benefits that flow from it.
377  What is likely to happen to the exchange rate during phase 2 if the government (a)
seeks to maintain a stable rate of interest; (b) raises the rate of interest in order to
dampen the growth in aggregate demand?
(a) In phase 2 interest rates will tend to rise. If the government attempts to keep
interest rates constant, the exchange rates will tend to depreciate.
(b) The higher interest rate will encourage short-term capital inflows and help to
prevent the exchange rate depreciating. If the interest rate is raised sufficiently, the
exchange rate will actually appreciate.
4