4. Briefly discuss the classical view of the labor market. Specifically, to what extent can unemployment occur based on the classical view? Explain.5. Based on the classical view of the labor market, explain the characteristics of the aggregate supply curve.Difficulty: E Type: C19. Explain how social or implicit contracts might result in sticky wages.20. Explain how explicit contracts might help explain sticky wages. Also, briefly explain why workers and firms would enter explicit contracts.21. How does the efficiency wage theory help explain the existence of unemployment?37. Graphically illustrate and describe the principle of sticky wages. What are some causes of inflexible or sticky wages?38. Explain the relative-wage explanation of unemployment.39. Explain how incomplete or imperfect market information may contribute to unemployment.40. Explain how the minimum wage laws may cause unemployment. What age group is most adversely affected by the minimum wage law?42. Explain how the minimum wage laws account for a percentage of unemployment.43. Explain what the Phillips curve represents.45. Explain what role import prices play in determining the Phillips curve.46. Explain what role expectations play in determining the Phillips curve.Difficulty: E Type: DDifficulty: M Type: ANAIRU is the non-accelerating inflation rate of unemployment.Chapter 14 (27): The Labor Market, Unemployment, and Inflation 14(27) The Labor Market, Unemployment, and Inflation The Labor Market: Basic Concepts1. Define cyclical unemployment.It is the increase in unemployment that occurs during recessions and depressions.Difficulty: E Type: D2. What is the labor supply curve?It is a graph that illustrates the amount of labor that households want to supply at each particular wage rate.Difficulty: E Type: D 3. Differentiate between frictional unemployment, structural unemployment, and cyclical unemployment. Frictional unemployment represents short-term unemployment that results fromjob changes or the search of recent graduates for long-term, career-oriented employment. Structural unemployment represents long-term labor displacementthat results from a lack of necessary skills or educational requirements. Individuals must be retrained to meet new employment requirements. Cyclical unemployment is a measure of job losses that result from cyclical downturns in the economy. During a recessionary period, businesses typically lay off employees until sales and production needs increase during expansionary periods. Difficulty: E Type: D273Test Item File 3: Principles of MacroeconomicsThe Classical View of the Labor Market4. Briefly discuss the classical view of the labor market. Specifically, to what extent can unemployment occur based on the classical view? Explain. The classical view of the labor market assumes that wages are sufficiently flexible so that the labor market is always in equilibrium. Alternatively, if there is an excess supply or excess demand for labor, the wage will quickly adjust to eliminate this surplus or shortage of labor. Because wages adjust so quickly, we would not observe unemployment based on the classical view. Difficulty: M Type: A5. Based on the classical view of the labor market, explain the characteristics of the aggregate supply curve. Because the labor market adjusts so quickly to changes in demand and supply, the labor market also adjusts quickly to changes in the price level. If there is an increase in the price level, the wage (nominal) will quickly adjust to this change in P. In this case, wages would adjust completely to any changes in the price level. Because wages adjust to changes in the price level, the aggregate supply curve, based on the classical view, would be vertical. Specifically, changes in the price level will have no effect on the level of output. Difficulty: M Type: A6. According to the Classical view, what are the factors that are used by the household indetermining how much labor to supply? Why might some members of the household decide not to be part of the labor force?Households look at the market wage rate, the prices of outputs, and the value of leisure time. A household member not in the labor force has decided his or her time is more valuable in non-market activities. Perhaps the reason has to do withraising children or caring for an elderly parent who is sick or disabled.Difficulty: E Type: C7. What is the labor demand curve?A graph that illustrates the amount of labor firms wishes to employ at each particular wage.Difficulty: E Type: F8. Explain how a decline in the demand for labor does not necessarily mean that unemployment will rise.274Chapter 14 (27): The Labor Market, Unemployment, and Inflation A decline in the demand for labor will initially create an excess supply of labor. Like many other markets this will push wage rates down until the quantity of labor supplied again equals the quantity of labor demanded, restoring the labor market to equilibrium.Difficulty: E Type: C9. Explain why Classical economists argue that the unemployment rate is not a very accurate indicator of whether the labor market is working properly.The Classical economists argue that the unemployment rate is not a very accurate indicator of whether the labor market is working properly because people who are classified as unemployed have chosen not to accept jobs at the wages offered.Difficulty: M Type: C10. Using the Classical view, draw a graph which illustrates the impact of a decline in thedemand for labor on the wage rate and the equilibrium level of employment.Difficulty: E Type: A11. Assume that the percentage of the labor force covered by labor contracts that set wages for a predetermined period of time decreases. How will this impact the effectiveness of fiscal and monetary policy and why?It will decrease the effectiveness of both monetary and fiscal policy. The reason isthat increases in the price level that may be forthcoming from either an 275Test Item File 3: Principles of Macroeconomicsexpansionary monetary or fiscal policy are likely to allow for greater upward flexibility in wage rates, which will place added pressure on inflation.Difficulty: D Type: C12. According to Classical economists, how will the economy respond to an increase in the demand for output?Output will tend to rise. This will trigger an increase in the demand for labor, which will cause wages to rise. This will then draw more workers into the labor market.Difficulty: E Type: C13. What