• 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...


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.


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.


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)

    A final method of reducing government intervention and allowing freedom of growth would be through privatisation of the public sector. The state are not as qualified to determine resource allocation in comparison to the private market. Therefore state run organisation (such as the NHS in Britain)

  2. Free essay

    Define and determine the types and trends of UK unemployment

    4 star(s)

    This may be because they have been unemployed for so long that they have lost all motivation for searching for work or they may have lost their skills requires. In any economy there will always be a certain amount of unemployment, even when there is 'full employment'.

  1. 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.

  2. It is impossible for unemployment ever to be zero

    The equilibrium of a labour market is at point W1 where the curve AD crosses with the curve AS. The latter shows where aggregate supply equals aggregate demand. However, if real wages rate rises above equilibrium point, it would cause excessive supply of labour, which is visibly illustrated on the diagram.

  1. Macroeconomic Impact on Business Operations

    This is called demand pull inflation. A decrease in the money supply will not necessarily reduce inflation. Interest rates are the percent of an amount a lender demands for the use of a certain amount of money (McConnell, 2005, pg 804).

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

    This may worsen the condition of structural unemployment. Though inward foreign direct investment may increase aggregate demand, it can be argued that such companies are firmly rooted in the country from which they originated and are parked in Singapore as a tax haven.

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

    A trade deficit would suggest that the exports are less than imports and a surplus would indicate that the country is exporting more than it imports. Balance of payments deficit is a situation in which debits exceed credits which leads to a shortfall of foreign currencies and causes problems.

  2. Explain why a change in the budget deficit may lead to a more than ...

    become more confident about the state of their economy and begin consuming/investing more into the UK, and these multiple injections will serve to create a multiplier effect once again, albeit smaller as consumer spending and investments are unlikely to change drastically in a short period of time.

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