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the natural rate of unemployment will increase
the unemployed worker will be less eager to seek a new job
Public policy can also have a powerful effect on the natural rate of unemployment. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker who loses a job is guaranteed a generous package of unemployment insurance, welfare benefits, food
stamps, and government medical benefits, then the opportunity cost of unemployment is lower and that worker will be less eager to seek a new job.
What seems to matter most is not just the amount of these benefits, but how long they last. A society that provides generous help for the unemployed that cuts off after, say, six months, may provide less of an incentive for unemployment than a society that provides less generous help that lasts for several years. Conversely, government assistance
for job search or retraining can in some cases encourage people back to work sooner.
the car loan must be repaid at a real interest rate of zero
Ordinary people can sometimes benefit from the unintended redistributions of inflation. Consider someone who borrows $25,000 to buy a car at a fixed interest rate of 9%. If inflation is 9%, then the real interest rate on the loan is zero. In this case, the borrower's benefit from inflation is the lender's loss.
A borrower paying a fixed interest rate, who benefits from inflation, is just the flip side of an investor receiving a fixed interest rate, who suffers from inflation. (9%−9%=0%)
The lesson is that when interest rates are fixed, rises in the rate of inflation tend to penalize suppliers of financial capital, who receive repayment in dollars that are worth less because of inflation, while demanders of financial capital end up better off, because they can repay their loans in dollars that are
worth less than originally expected.
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