|Question||A firm has the choice of hiring either permanent or temporary employees when it needs to expand its output. If the firm hires temporary workers, it does not have to pay severance costs if it lets the workers go, which it will have to pay if it lays off anyone hired on a permanent basis. On the other hand, the wage rate paid to temporary workers exceeds the wage rate paid to permanent workers. The firm knows that the Fed follows a Taylor Rule and weighs equally the inflation rate and the output ratio. Given that the firm has rational expectations, discuss what the firm must consider in deciding whether to hire temporary or permanent workers when it sees its sales rise as the economy expands. How will its decision be affected if
(a) The unemployment rate has just started falling or
(b) The economy has been expanding for a number of years?