ECON HOMEWORK

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 aggregate demand?

The first argument claims that the unemployment in Europe is due to the natual rate of unemployment. Economists claim that these European nations have already reached full-employment, with only frictional and structural unemployment present. Thus, there is a high natural rate of unemployment due to the huge costs of hiring workers. The welfare benefits offered to the workers far exceed the benefits of working in some cases. The second argument claims that the unemployment in Europe is a result of a deficient aggregate demand. European governments , in fear of raising inflation rates, has not increased AD and thus the country is producing at an output less than the optimal point. The reason for unemployment in Europe is perhaps a combination between these two theories.

2) Explain the experience of the US between 1996 and 2000 when the economy was at greater than full employment with high GDP growth while maintaining low levels of inflation. What allowed this so-called "New Economy" to occur, and what brought it to an end in 2001?
This "New Economy" was perhaps brought to an end in 2001 because of 911.