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1. Why is it so difficult to define full employment? What unemployment rate should the government be shooting for today?
2. Show why each of the following complaints is based on a misunderstanding about inflation:
a. Inflation must be stopped because it robs workers of their purchasing power.
b. Inflation makes it impossible for working people to afford many of the things they were hoping to buy.
c. Inflation must be stopped today, for if we do not stop it, it will surely accelerate to ruinously high rates and lead to disaster.
1) The unemployment rate associated with full employment is a key parameter. Its a landing strip that determines their flight path in ways that have profound implications for the passengers on board, especially, as we stress below, those sitting in coach. A linchpin of our argument is that for much of recent history, this rate has been pegged too high, and the costs to working families have been steep. As well stress in a moment, despite all the point estimates out there, neither we nor anyone else knows the precise answer. But the costs of overestimating it and economic history is replete with upwardly biased estimates are a lot higher than those of underestimating it. Most important to us, those costs fall hardest on the working households that have faced wage and income stagnation for decades. Compared with the current situation, wed gladly welcome 5.5 percent unemployment, though frankly, not as much as the tens of millions of un- and underemployed people who depend on tight labor markets to give them a fair shot at claiming their fair share of the economys growth. 2) a) It assumes that workers’ wages do not inflate WITH prices. The biggest cost of inflation isn’t that it robs workers of their purchasing power but it robs savings of its purchasing power. Inflation of 50%, to be extreme, will cut your savings in half…

n real terms. As another poster correctly stated, debt is also affected. With higher inflation, debt is actually decreased in real terms. This could be good for workers if they have a high debt load. There is also the concept of monetary illusion that says inflation is psychologically good for the labor market. When wages reach equilibrium, they may have to decrease from time to time. However, inflation will tend to turn this reduction positive. So instead of getting pay cuts, workers get smaller raises due to inflation. According to this concept, inflation “greases the wheels of the labor market” . b) It in fact raises the income of workers and employment. c) This is true,it might go out of hand.It can be accelerated.But if it is under control under the target rate of 2-3%, it will not be out of hand. On the contrary, it will benefit the economy. Stop it is a long word, but force it to be away from bubble.


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