Paper details:
Assignment Two
Read ?Past and Prospective Causes of Unemployment? by Paul Krugman
Questions for Krugman
1. What is the difference between structural and cyclical unemployment?
2. If demand pushes unemployment below its natural rate what is the consequence? What evidence does
Krugman cite for this claim?
3. Briefly explain Hysteresis and contrast it with the natural rate hypothesis.
4. The arguments Dr. Krugman makes against the globalization hypothesis of inflation and unemployment are
mostly empirical. Which argument do you find most compelling? Explain it briefly. If you do not find any of them
compelling and wish to argue in favor of globalization briefly refute any two of the three arguments.
5. Recreate table 2 ?Skill level vs unemployment in the UK 1984? for the US in the most recent year possible.
Cite your sources and clearly label your table and all of its components.
6. If the welfare state is weak (the welfare payments are low) why does a push towards inequality not lead to as
much unemployment as it does in a strong welfare state?
7. Which explanation for increasing the natural rate of unemployment does Krugman find to more likely,
inequality or the welfare state? Why?
8. What does Krugman mean when he says ?The available evidence suggests, however, that the
unemployment problem has a life of its own and is not simply part of a generalized deterioration in economic
performance. ??
Read Thomas Sargent?s ?Reaganomics and Credibility?
Questions for Sargent
1. What is a game?
2. What is a dynamic game?
3. What is a strategy?
4. What is equilibrium?
5. In the US who is the public? Who is the monetary authority? Who is fiscal authority?
6. When does a government deficit translate into a price increase?
7. Why, under the Ricardian regime, does the government deficit not translate into a price change?
8. Why, according to Sargent, were Reagan?s fiscal and monetary policy regimes ?incredible?? Explain carefully.
9. What goal did the Reagan administration have by setting the monetary policy it did? What unintended
consequence did this have in the economy? What lesson should future government actors (both fiscal and
monetary) learn from this case?
Compare and contrast question
Both of these papers discuss the main ways we measure an economy wide level of performance; inflation,
unemployment and production. Compare and contrast Krugman?s thoughts on unemployment (as driven by the
welfare state and inequality) and Sargent?s assessment of the Reagan administration?s policies on these same
measures. That is to say, if we took the critical of ideas from Krugman how might we implement them in the
scenario Sargent analyzed to get a deeper, more detailed analysis? Bear in mind that these two papers analyze a
similar time frame, from the late 1980s to the mid?1990s. (This is a very difficult question. Take your time thinking
about it and answering it but?????? know that I will take into account the difficulty of the question.)

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