Macroeconomics 1

Macroeconomics 1
ECO202 –Macroeconomics
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Macroeconomics 2
Question 1. Four types of unemployment
i. Frictional unemployment
This type of unemployment occurs when individual take time to move from one job to
another. In frictional unemployment, individuals are usually between jobs or are
graduates who have just completed university or college and are looking for a job.
This type of unemployment is normally short-lived in nature(Garcia-Murillo,
MacInnes and Bauer, 2015).
ii. Cyclic unemployment
Cyclic unemployment occurs when the economy has not reached its full capacity.
People in this type of unemployment are usually laid off due to a decline in demand
for their products and they are looking for another job(Diamond, 2013). This type of
unemployment is generally temporary in nature. For instance, during recession
periods, the demand for durable products like houses and cars usually decreases.
People in these industries normally lose their jobs until the demand rise again(Garcia-
Murillo, MacInnes and Bauer, 2015).
iii. Structural unemployment
This type of unemployment results due to mismatch of knowledge and skills in the
labor market. In structural unemployment, people lose jobs and start looking for other
jobs because of technological advancement or any other structural changes in
production(Lindbeck, 2015). For example, due to outsourcing where companies locate
their companies abroad to overcome competition, many workers often become
structurally unemployed. This type of unemployment is usually permanent in nature
iv. Seasonal unemployment
This type of unemployment usually occurs due to seasonal changes. People often
become unemployed and start looking for new jobs during the off seasons(Diamond,
2013). For example, workers working in ice cream vendors may lose their jobs during
the winter seasons due to a decrease in demand.
Question 2a Advantages of a flexible exchange rate regime
a) Monetary policy autonomy
In flexible rates regime, countries can establish autonomous monetary policies to
address output and inflations problems. Since monetary policies affect inflation rates,
under flexible exchange rates regime, nations can create their long-run inflation rates

Macroeconomics 3
without necessarily importing inflation rates from their trade partners(AL-Thumairi,
2012).
b) Promotes economic development
Flexible exchange rate systems help the country to achieve full-time employment of
its citizens and promote the economy. This is due to the fact that, the exchange rates
can be changed in accordance with the needs of the nation in terms of monetary
policy in order to achieve national goals(Azcona, 2017).
c) Promotes international trade
Flexible exchange rates regime does not permit exchange control thus promotes free
trade. International trade restrictions are removed and there is free movement of
money and capital between countries.
Disadvantages
a) Potential exchange rate risks
Flexible exchange rates systems are volatile as changes in exchange rates are
larger and more frequent than the underlying fundamentals suggests(Amalia
Morales-Zumaquero and Sosvilla-Rivero, 2014).
b) Low elasticities
The elasticities in the global markets may become too low for exchange rates thus
making the exchange market unstable.
c) The potential for too much use of the expansive monetary policy.
For a country to be able to create autonomous monetary policies, it must first be
able to establish higher inflation rates. Flexible exchange rates can lead to
inflationary and recessionary pressures due to contractionary and expansionary
monetary policies(Dellas and Tavlas, 2013).
Advantages of Fixed Exchange rates regime
a) Provide currency stability
A fixed exchange rate regime provides currency stability. Fixed exchange rates
system promote foreign investors making the nation’s businesses attractive. This
is due to the fact that investors do not try to protect themselves from a change in
currency value(Azcona, 2017).