Week Economics Essay

 Week Economics Essay1a) Discuss the different types of unemployment
Frictional Unemployment
This is unemployment is due to the natural frictions that occur within an economy. This is caused by changing conditions and is represented by qualified individuals with transferable skills who change jobs. An example of this is an individual who has just came out of a temporary contract with a construction firm and is now searching for another job.

Structural Unemployment
This is due to structural changes within the economy which eliminate jobs leaving individuals unemployed. For example, In September 2008 the world suffered a severe financial crisis which impacted Woolworths Group plc. causing them to go into administration in January 2009. Their downfall resulted in 27,000 jobs lost.

Cyclical Unemployment
This is due to a downturn in the business cycle. For example if you look at the diagram you can see that there are four stages to a business cycle. When the economy hits the recession stage, firms decrease their production making part of their work force irrelevant. This is what causes firms to fire employees.

1b) The Office for National Statistics recently announced that the unemployment rate was reduced to 7.8% from 7.9%. In your opinion, which type of unemployment is responsible for this reduction? Explain your answer
I believe frictional unemployment is responsible for the reduction because the labour force is what makes up the employment rate and individuals are considered part of the labour force when actively looking for a job. As frictionally unemployed individuals find jobs, the employment rate decreases. My theory is that the FED used policies effective and efficiently enabling businesses to lend at a reasonable rate whilst creating more jobs, thus decreasing employment rate. There are also conspiracies around the rate drop which are arguable. Ron Lazof, Blogger for us news states “As more people drop out of the labour force, or give up looking for work, they're no longer counted as being unemployed”. In the time period of which the office of national statistics collected their data, frictionally unemployed individuals could have dropped out of the labour force, also causing unemployment rate to decrease.

2a) Describe what the monetary policy is. Also, describe the conventional tools used by central banks.
Monetary policy is referred to changes to the money supply in order to achieve specific macroeconomic goals. There are three tools used by central banks to regulate money supply in the economy. This way central banks can control the financial system.
Open market operations
This is a tool used by central banks In order to manipulate the money supply. Central banks can control money supply by purchasing and selling government securities/bonds. By purchasing securities, the money supply increases enabling central banks to decrease interest rates and by selling securities, the money supply decreases causing interest rates to rise.
Reserve requirement
Reserve requirement is the percentage of deposits that banks are obligated to keep on reserve. They have instituted reserve requirements to make sure that when consumers withdraw money, banks have to cash to meet your needs. If a banks reserve requirement is 10% then they are only allowed to lend 90% of deposits to its consumers. The lower the reserve requirement, the more banks can lend and the higher the percentage, the fewer banks can lend.
Discount rate
Sometimes banks run low on money supply. This could be because they went over the reserve requirement so they borrow money from central banks. The interest rate central banks charge banks are known as discount rate. This rate is what controls the interest rate banks charge consumers; the higher the discount rate, the higher banks interest rates.

2b) Describe what the monetary policy is. Also, describe the conventional tools used by central banks
Transmission mechanism describes how monetary policy decisions (manipulating interest rates) have effect on the economy as a whole. Monetary transmission mechanism can become ineffective when caught a situation called “liquidity trap”. This is when government lose control of the economy as setting low/zero rates fail to stimulate. When consumers stop spending and start saving, money is not being generated around the economy. Central banks then inject money into banks in hope the increase in money supply will lower interest rates which will lead to higher investments and consumption

But because the interest rate is at its lowest, it cannot be reduced anymore so money supply is cut off. Interest rates stop moving so investments are reduce leaving banks with an excess amount of money to loan in an economy where no-one wants to spend


BBC News. “Woolworths set for administration.” 26 November 2008. http://news.bbc.co.uk/1/hi/business/7751064.stm
Ron Lazof. “On Unemployment, 7.8 Percent of What?” 12 October 2012. http://www.usnews.com/opinion/blogs/economic-intelligence/2012/10/12/whats-behind-the-78-percent-unemployment-rate
John p Birchall. “Thinking about Evolution & Economics and Some Notes on the Evolution of Ideas.” http://www.themeister.co.uk/economics/creative_destruction.htm
Biz/ed. “Monetary Policy.” 05 October 2010. http://www.bized.co.uk/dataserv/chron/news/3698.htm

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