Skip to main content

Table of Contents

  1. Topic pack - Macroeconomics - introduction
  2. 2.1 The level of overall economic activity (notes)
  3. 2.1 The level of overall economic activity (questions)
  4. Section 2.2 Aggregate demand and supply (notes)
  5. Section 2.2 Aggregate demand and supply (simulations and activities)
  6. 2.2 Aggregate Demand and Aggregate Supply (questions)
  7. 2.3 Macroeconomic objectives (notes)
  8. Low Unemployment
    1. Low Unemployment
    2. What the data says
    3. The meaning of unemployment
    4. Case study - regional variation
    5. Consequences of unemployment
    6. Case study - tougher for men
    7. Types and causes of unemployment
    8. Disequilibrium unemployment
    9. Equilibrium unemployment
    10. Policies to reduce unemployment
    11. Low and stable inflation
    12. Low and stable inflation (notes)
    13. The meaning and measurement of inflation
    14. A consumer price index
    15. Finding out more about consumer price index weights
    16. Problems with measuring inflation
    17. Inflation - videos
    18. Consequences of inflation
    19. Hyperinflation
    20. The consequences of deflation
    21. Types and causes of inflation: demand-pull inflation
    22. Types and causes of inflation: cost-push inflation
    23. Case Study - car prices in Trinidad
    24. Possible relationships between unemployment and inflation
    25. PlotIT - Phillips curve
    26. Phillips curve - long-run
    27. Natural rate of unemployment
    28. NAIRU
    29. Economic growth
    30. Economic growth (notes)
    31. Causes of economic growth
    32. Economic growth and the PPF (1)
    33. Economic growth and the PPF (2)
    34. Economic growth and the business cycle
    35. Economic growth and the aggregate supply curve
    36. Consequences of economic growth
    37. Equity in the distribution of income
    38. Equity in the distribution of income (notes)
    39. Indicators of income equity
    40. Poverty
    41. The poverty line: An Indicator of Relative poverty
    42. The causes of poverty
    43. The role of taxation in promoting equity
    44. The role of taxation in promoting equity (notes)
    45. Other methods of promoting equity
  9. 2.3 Macroeconomic objectives (questions)
  10. 2.4 Fiscal policy (notes)
  11. 2.4 Fiscal policy (questions)
  12. 2.5 Monetary policy (notes)
  13. 2.5 Monetary Policy (questions)
  14. Section 2.6 Supply-side policies (notes)
  15. 2.6 Supply-side policies (questions)
  16. Print View

Policies to reduce Demand Deficient unemployment

Syllabus: Evaluate government policies to deal with the different types of unemployment.

If unemployment is cyclical or demand-deficient, then the best policy to get rid of it will be to boost the level of aggregate demand (Standard Keynesian argument - contested by Neoclassicals).

Sounds easy, but how can the government achieve this? They use expansionary monetary policy and/or fiscal policy the aim is to shift AD to the right remember.

This could mean:

  • Cutting interest rates - this should encourage consumption (Credit) and investment (Borrowing) and, therefore, boost aggregate demand (Monetary Policy)
  • Increasing the Money Supply - More money implies more expanditure (Monetary Policy)
  • Increasing government expenditure - government spending is a crucial component of aggregate demand and so increasing spending, perhaps on education, health or roads, will help boost aggregate demand and reduce unemployment. (Fiscal Policy)
  • Cutting taxes - government could cut direct and/or indirect taxes; both of these actions should encourage consumption . Higher consumption should mean more employees are required to make the additional goods and services demanded. A reduction intaxes on profits might also encourage investment. (Fiscal Policy)

These expansionary fiscal or monetary policies should increase aggregate demand and shift the aggregate demand curve to the right as in figure 1 below.

ad_as_ad_rightPut in Keynesian LRAS instead/as well

Figure 1 Expansionary fiscal/monetary policy

This solution appears to be quite simple, but in macroeconomics things are rarely as simple as they first appear! As we already know, policy conflicts can arise, especially the possible effects on inflation of higher aggregate demand.

So, a mixture of monetary policy, fiscal policy and supply-side policies (see later but basically shifting Aggregate Supply to the right)  would normally be used. Governments hope that supply-side policies will boost the capacity of the economy and enable higher aggregate demand, but without the associated inflationary pressures.

In the long run, if there is no shortage of aggregate demand, the cause of the unemployment is likely to lie with supply-side problems, such as geographic and occupational immobility of labour, lack of appropriate skills and training or a lack of information (Structural Unemployment).

This type of unemployment can be tackled by application of appropriate supply-side policies, as previously identified in Section 2.6.

Past paper Essay

May 2010 TZ2

2. (a) Explain why a country may wish to reduce its unemployment rate. [10 marks]

    (b) Evaluate the likely effects on the economy of relying on demand-side policies to reduce the unemployment rate.     [15 marks]