• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

How does level of aggregate demand affect level of unemployment

Extracts from this document...

Introduction

To what extent can government attempts to influence the level of aggregate demand affect the level of unemployment The government can attempt to influence the level of Aggregate demand through Fiscal policy and Monetary policy. If unemployment is relatively high then either interest rates can be lowered to expand demand (Monetary Policy) or, alternatively, the government could lower taxes and boost government spending (Fiscal policy). These measures should expand demand and lead to a fall in unemployment but the overall impact of both policies can be quiet different. Unemployment can be caused by both demand side and supply side factors. On the demand side unemployment is attributable to Demand Deficient Unemployment or Cyclical Unemployment. Here workers are unemployed simply because there is insufficient demand to provide them jobs. ...read more.

Middle

In fact, if the bulk of the unemployment is supply side, then such an expansion may create inflation. A fiscal expansion through tax cuts may have a similar effect. However, an expansion through specially targeted government expenditure could be effective especially with structural unemployment but the spending may take time to work. Structural unemployment is caused by lack of skills, so heavy government spending on education and training will help close the skills gap and lead to more workers finding jobs. Similarly, if there is pronounced regional unemployment spending on regional policy will help provide it is targeted at specific causes of unemployment. Unemployment causes by age can be reduced again by targeted government spending backed up by appropriate legislation. ...read more.

Conclusion

This is the rate of unemployment below which inflation will result if the government expands demand. As mentioned cuts in national tax rates and national interest rates will stimulate demand but will not directly tackle the underlying causes of much UK unemployment. That requires targeted increases in government spending. There is finally one other cause of unemployment and that is where people are better off on benefit than in work of withdraw from the labour force. Again, specially tailored fiscal measures can reduce this problem and the UK has made more progress on this than most other major EU nations. In Holland, Germany and France benefits are far more generous than the UK. To conclude only well directed government spending plans can reduce unemployment in the long run. Blanket expansions from lower interest rates and taxes can only directly lower cyclical unemployment but the causes of unemployment in the UK go beyond that. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a star student thought of this essay

3 star(s)

Response to the question

This essay responds well to the question, but there is plenty of room for improvement. I would've liked to have seen the extent really questioned here. If I were doing this essay, I would've explored the fact that aggregate demand ...

Read full review

Response to the question

This essay responds well to the question, but there is plenty of room for improvement. I would've liked to have seen the extent really questioned here. If I were doing this essay, I would've explored the fact that aggregate demand is only a solution to cyclical unemployment, and structural or frictional unemployment will be unaffected. This would've allowed some discussion if the effectiveness depending upon the type of unemployment, along with other factors such as the size and significance of government policies.

Level of analysis

The analysis in this essay is sound. I liked how there was awareness that fiscal policies can reduce unemployment, only if targeted. However, the foundations of analysis aren't there due to the lack of a diagram! There needs to be an aggregate supply and demand diagram showing the basic principle of an increase in aggregate demand increasing real GDP and thus reducing unemployment. In my experience, evaluative points such as "the spending may take time to work" will be redundant if the analysis isn't there! The essay tends to assert knowledge rather than fully explain it. For example "cuts in national tax rates and national interest rates will stimulate demand" is a great chance to explain the mechanism. Making a clear progression from a cut in interest rate, exploring each step, to a reduction in unemployment would be a great way to get the analysis marks. For evaluation, there needed to be some discussion of the size of the policy and as mentioned earlier, the most prominent type of unemployment in the economy.

Quality of writing

I don't think this essay has the right structure here. The paragraphs should be analysing different policies to increase aggregate demand, and then showing why it will affect each unemployment type differently. This would've been more focused on the question, rather than going through each type separately. I like the writing style here, as it makes for a convincing argument. Sentences are concise, meaning there are less irrelevant bits! Spelling, punctuation and grammar are strong.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by groat 14/03/2012

Read less
Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    Thatcher privatised many government enterprises (50 in total), including British Airways, British Steel, British Telecom and British Gas. This privatisation resulted in the governments revenue (through these enterprises) increasing from �2.6bn in 1986 to �7bn by 1989. Although this laissez faire attitude seems to resolve the crisis of inflation it does carry many negative repercussions.

  2. Peer reviewed

    Discuss the effectiveness of fiscal policy measures in reducing aggregate demand?

    4 star(s)

    Firstly, the decrease in consumption depends on YED. A big change in disposable income would not necessarily bring a big change in consumption. If YED is elastic, that is true, but if not, consumption would not decrease as much as disposable income.

  1. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    there is an increase in aggregate demand, therefore a shift of the AD curve from AD1 to AD2. In the short run, there is an increase in output and a small increase in the price level. However, in reality, workers do not want top work extra hours, therefore they demand higher wagers.

  2. The Ghost of Unemployment in Egypt.

    even though population growth has slowed down in Egypt in the recent years, the labour force continues to expand (Egypt 1). Overpopulation is a great menace that threatens the Egyptian society of the great increase in the unemployed labour force.

  1. Critically examine the hypothesis that economic recovery in the 1930s was based upon the ...

    1932-7, suggesting that new British industries were gaining ground and thus helping to stimulate growth through increased output.

  2. Has globalization been of benefit to the Singapore economy?

    The greater competition from similar low-cost foreign producers may not result in more exports. Consumers may substitute domestic goods with the cheaper and a wider variety of foreign goods. Domestic firms may close down with the increase in imports as they may not be able to compete.

  1. Greece financial crisis: The main causes of this crisis are? What are ...

    Greece adopted the euro (�) as its currency in January 2002. The adoption of the euro provided Greece (formerly a high inflation risk country under the drachma) with access to competitive loan rates and also to low rates of the Eurobond market.

  2. Unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand

    However, increasing interest rate will lead to a decrease in aggregate demand and thus may has negative effects to other objectives and so will required to be considered. In the short-run, the objectives of macroeconomic are all vary with the course of the business cycle.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work