1) (a) Discuss the different types of unemployment. (20 marks) Unemployment is a condition where a person is without employment but at the same time wishes to be employed. There are a number of types of unemployment, which are as follows: Frictional unemployment: Frictional unemployment is short term and occurs when someone changes jobs. This type of unemployment is arguably inevitable as a result of the job search process and labour mobility. Seasonal unemployment: As a result fluctuating demand in relation to season, demand for labour also fluctuates, in certain seasons the demand for labour could drop, resulting in unemployment.
Examples of businesses affected by seasonal unemployment are those related to tourism e.g. hotels and tourist resorts. Major festivals could also contribute towards this. Structural unemployment: Change in structure of industries can result in unemployment. If a certain industry is experiencing recession or has made advances in technology, the demand for labour could fall as business try to save money and cut down on workers or replace them with technology.
“Voluntary” unemployment: this is an idea associated with certain economists who believe that certain individuals choose to be unemployed and claim benefits instead of accept work where the pay levels are similar. Cyclical unemployment: Cyclical unemployment is also known as deficient-demand unemployment, it occurs when there is a lack of aggregate demand (AD) to be able to offer jobs for everyone. Since demand falls, less production is needed, hence a fall in employed workers. With cyclical unemployment the unemployed workers outweigh the number of jobs available.
(b) 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.(20 marks)
In my opinion the cause of the reduction is due to seasonal unemployment. My reasoning for this is that seasonal unemployment allows workers to be employed for a limited amount of time before a change in seasons make them unable to continue with their work. Any job that requires snow could be an example, whether that is teaching of skiing, snowboarding or sledding once the snow is gone, their job is lost. As summer is approaching it is likely that there will be an increase in unemployment as winter jobs finish.
2) (a) Describe what the monetary policy is. Also, describe the conventional tools used by central banks. (20 marks) A monetary policy is generally implemented by a central bank. Monetary policy is expected to improve the economies GDP in the forthcoming quarters. Monetary policy focuses on interest rates and the total supply of money. Monetary policy uses numerous tools to control either interest rates or money supply, at times even both. It could be used to combat unemployment, inflation, exchange rates and can impact economic growth. If the policy decreases the money supply or increases interest rates, this is known as contractionary. Its opposite, expansionary increases the money supply faster or decreases the interest rates. Some tools used by central banks are as follows.
Bank Rate: This is the rate charged by Central bank for giving loans to member banks, if changed; Central bank can manipulate the credit. If increased, commercial banks will increase their rates of interest which will make loans more expensive. If Central bank looks to expand credit then it will decrease bank rate which will have a reverse effect and make loans cheaper in commercial banks.
Marginal Requirements of loans: This is the difference between the security and the actual value of the loan. If Central bank wishes to contract credit they will increase the rate of interest which would increase the marginal requirements, hence discouraging people from taking loans and vice versa if the rate of interest was to be decreased.
Cash Reserve Ratio: This is the smallest percentage of the deposit which is to be reserved by the banks with Central bank. Once again changes in the reserve could be used to contract and expand credit in an economy. If Central bank looks to contract credit, the ratio would increase meaning banks would have to keep a higher amount as a reserve with Central bank, as a result of this banks would issue less credit to public, vice versa if there was a decrease in the ratio.
(b) In the summer of 2012 Christian Noyer, Governor of the Central Bank of France declared that: “…the interest rate facing individual private banks depends on the funding costs of the State where they are domiciled and not on the ECB interest rate… Hence the monetary policy transmission mechanism does not work.” Discuss the above statement explaining what the transmission mechanism is and how it could stop working. (40 marks)
Transmission mechanism is the process where monetary policy decisions affect the economy and the price levels specifically. There are different and uncertain time lags in the transmission mechanism therefore it is difficult to foresee the result of monetary policy actions on the economy and prices. Borrowing costs in the Eurozone have lost the inter-bank lending rate as banks no longer lend to one another and the ECB interest rates are ignored during lending.
As governor Noyer Quotes “the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate” this means that the fear of breakdown of the Eurozone has led to a disconnection between the ECB’s overnight rate with the borrowing costs of the private sector. Now the issue is that the member state in which the firm is in will be unable to refinance itself. In a continuous loop this looks to assure that the member state will be unable to refinance itself and assures the ECB’s failure to lower interest rates even if when it drives its official rates to 0. Economic growth is continuously slow throughout the Eurozone. Since the transmission mechanism has been unsuccessful the only remaining policy is fiscal policy which also seems to be moving on the incorrect course.