NAIRU multiple choice question (1 Viewer)

[atargainz]

Which of the following policies would be most likely to reduce an economy's NAIRU?
a) Expansionary fiscal policy
b) Contractionary monetary policy
c) Policies that increase factor market competition
d) Policies that decrease product market competition

Quoting from the 'Leading Edge' textbook "The NAIRU can, however, be reduced over the long term through policies that improve the skills of unemployed people or address other hurdles to their participation in work"

So I thought the answer was B since expansionary fiscal can mean increased govt expenditure on training programs etc but the answer is C, please explain. Thanks guys

 

[YouCantMakeMe]

Macroeconomic policies won't reduce an economy's NAIRU because they only address cyclical unemployment (and NAIRU is the point when cyclical unemployment is zero or near zero). This knocks out both A and B. Obviously D won't decrease unemployment so the remaining answer is C.

You're right in that government expenditure on training programs can decrease the NAIRU (since that's an MER which addresses structural unemployment). What you're not correct in assuming is that this is what the fiscal policy is. The fiscal policy is merely the budget outcome (i.e taxation + expenditure)
"Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy."- Investopedia.

I get what you mean though, it's a bit confusing when the budget is also a medium for the Govt to carry out MERs (such as training programs etc.) How I like to think about it (idk if this is right though) is that the budget is the total amount of expected government revenue and expenditure- and that's the fiscal policy. i.e how much money you're pumping in or taking out. It's only the aggregate demand side of the budget. As soon as a budget policy hints at something to do with aggregate supply/ increasing the productivity of something, then it's actually an MER.

 

[swagmeister]

The NAIRU can't be reduced by macro policy, because attempts to lower unemployment further will just create inflation. Here is the full statement from my notes on the topic which I wrote because it can be quite confusing:

"When unemployment is below the natural rate of unemployment due to increases in aggregate demand, the combination of inflationary expectations and firms competing for existing workers (as unemployed skills ≠ vacancies) will see raises wise, building inflationary pressure while unemployment remains at it’s original level as short term aggregate supply decreases due to the increased cost of labour."

The NAIRU can only be improved through supply-side micro reform, and factor market (which includes labour) competition is most relevant because it will likely help frictional and structural unemployment to decline.


Hope this helps bro!

We're all gonna smash it next week

 

[Ekman]

The NAIRU can't be reduced by macro policy, because attempts to lower unemployment further will just create inflation. Here is the full statement from my notes on the topic which I wrote because it can be quite confusing:

"When unemployment is below the natural rate of unemployment due to increases in aggregate demand, the combination of inflationary expectations and firms competing for existing workers (as unemployed skills ≠ vacancies) will see raises wise, building inflationary pressure while unemployment remains at it’s original level as short term aggregate supply decreases due to the increased cost of labour."

The NAIRU can only be improved through supply-side micro reform, and factor market (which includes labour) competition is most relevant because it will likely help frictional and structural unemployment to decline.


Hope this helps bro!

We're all gonna smash it next week

Something also worth considering is demand-pull inflation occurring when the economy is at NAIRU. If the government uses macro policies to increase AD in attempt to decrease unemployment further, then demand-pull inflation will occur as the increase in demand will cause prices to bid upwards as there will be the same limited amount of supply as there is no cyclical unemployment (meaning all resources are being employed) when the economy is at NAIRU. Also the whole idea of inflationary expectations beginning to increase, hence causing cost-push inflation via bargaining for wage increases is also relevant and necessary to talk about.

 

[turnerloos]

"expansionary fiscal policy" is a macro policy so it would shift AD not AS, and also it is too broad in terms of govt exp. allocation. But for C,
Increase factor mkt comp. = Increase comp. in land, labour, capital, enterprise = Increase productivity = Shift AS to right = laters NAIRU

 

[atargainz]

far thanks for the gun explanations guys, good luck next week!

 

[Mikes]

"expansionary fiscal policy" is a macro policy so it would shift AD not AS, and also it is too broad in terms of govt exp. allocation. But for C,
Increase factor mkt comp. = Increase comp. in land, labour, capital, enterprise = Increase productivity = Shift AS to right = laters NAIRU

I understand for the purpose of this question C is most appropriate but could you explain how an increase in AS leads to a reduction in the NAIRU?
To my understanding, even if there is increased competition in the factors of production, individuals who were previously structurally unemployed will remain unemployed as they still lack the skills desired by employers, especially if they are going up against the now more competitive factors of production. In THIS sense, increasing AS through increases in productivity will not lower the level of unemployment.

 

[spatula232]

I understand for the purpose of this question C is most appropriate but could you explain how an increase in AS leads to a reduction in the NAIRU?
To my understanding, even if there is increased competition in the factors of production, individuals who were previously structurally unemployed will remain unemployed as they still lack the skills desired by employers, especially if they are going up against the now more competitive factors of production. In THIS sense, increasing AS through increases in productivity will not lower the level of unemployment.

Yes. This is exactly what I thought. Obviously for this question it must be the correct answer as MER is the solution. However, I do think you're right to say that increasing competition alone won't reduce the NAIRU.

In regards to the bolded bit, I believe that in the long term it would -- however if the economy is at the NAIRU I am not so certain