Answered: . Assume that the South African economy…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Assume that the South African economy is at equilibrium where output is equal to the natural level of output. Now suppose there is an increase in unemployment benefits in the country. Use the IC-LM-PC model to graphically illustrate the effects of an increase in unemployment benefits on the labor market (the WS and PS curves), the goods and money markets (the IS and LM curves) and on the Phillips curve. In your answer illustrate the differences in what happens to output, inflation and real interest rate between the short-run (SR) and medium-run (MR).

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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