Module 3 - Case INTRODUCTION TO MACROECONOMICS

Module 3-Case Introduction to Macroeconomics Student’s Name University Course Professor Date Module 3-Case Introduction to Macroeconomics Question 1 Reasons for Unemployment in a "Full Employment" Economy: Structural unemployment: Structural unemployment can exist even if the economy is at full employment and performing at its best potential. This type of unemployment occurs when there is a mismatch between the skills employers seek in the market and those sought by job seekers (Hashimoto et al., 2023). Technological progression and industry changes can cause some workers to become jobless. Frictional Unemployment: In a dynamic economy, one may be out of work for some time before finding another job or moving to a different industry. Circumstances like information asymmetries, search costs, and time spent finding a suitable employment opportunity cause frictional unemployment, even when the macro economy is at full employment. Seasonal Unemployment: Some industries tend to have a cyclic demand pattern due to seasonal variation. Seasonal unemployment can exist because some employees are laid off during specific periods of the year, even when full employment is attainable for the economy. Costs of Unemployment Economic Costs: Unemployment can lower consumer expenditures since unemployed people have relatively lower incomes, affecting overall economic demand. This can lead to lower levels of output and possible economic downturns. Social Costs: Persistent unemployment can negatively affect the well-being of the unemployed and society, resulting in high unemployment rates, health complications, and even unstable societies. The increased duration of unemployment can also negatively impact the social welfare systems since more people depend on these programs. Human Capital Depreciation: Long-term unemployment leads to the loss of skills or even job-related competencies, which makes employees less effective in the job market. This may result in a decline in the general output and competitiveness of workers in the labor market and, hence, the general economy. Potential for Skills Mismatch: Long-term joblessness can contribute to a mismatch in skills available in the labor force, leading to difficulties for jobseekers rejoining the workforce and employers finding suitable candidates, thus hampering economic growth and technological advancement (Neffke et al., 2024). Question 2 CPI stands for “Consumer Price Index,” a measure of inflation that tracks the average change in price for goods and services that households buy. While CPI is one of the most commonly used measures for assessing tendencies in inflation rates, it can have biases that can negatively influence its accuracy. There are criticisms regarding how the CPI measures inflation; one of them is the substitution bias which stems from the fact that price changes will likely elicit a proportional change in the consumer's purchasing power (Fox et al., 2023). Consumers tend to change their spending habits, switch to cheaper brands, or purchase less overall when prices rise, which is only sometimes accounted for in the formula used for the CPI calculation. Therefore, this often results in overestimating the actual inflation rate prevalent in the economy. Another concern is the quality adjustment bias, which highlights that the CPI fails to account for the quality variations of certain products throughout the specified period. When price increases are attributed to factors such as improving product features or increasing product life span, it may not necessarily be inflation but quality improvement (Menz et al., 2023...