Homework 1

1. Weigh the two arguments regarding unemployment in Europe. Is unemployment high because of high because of high natural rates of unemployment or because of deficient aggregated demand?
The real answer to this question probably lies in between natural high rates of unemployment and deficient aggregated demand. Most of Western Europe is known for its social welfare and benefits, which provide high welfare to those that are unemployed. Therefore, a magnificent amount of people that are unemployed are not desperately looking for jobs. This means when Europe reaches "full employment" by the economic definition, there are still quite a significant amount of people unemployed. In addition, the interest rates in Europe may be too high, thus discouraging investment. This would lead to deficient aggregated demand because it leads to a lower GDP, and the expenditure approach to measuring GDP includes consumer spending/demand. Therefore, the high unemployment rate in Europe should be due to a mixture of natural high rates of unemployment and deficient aggregated demand.