How does level of aggregate demand affect level of unemployment
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. Clearly attempts by government to boost demand by either policy will lower this type of unemployment. However, supply side unemployment needs careful consideration. Supply side has several different causes such as frictional, structural and technological or real wage unemployment. Frictional is basically workers moving between jobs and is sometimes referred to as 'the oil that lubricates the labour market'. Although some economists may argue the fact generally frictional unemployment is unavoidable in a market economy. Structural is mismatch
Discuss the economic consequences of unemployment
Discuss the economic consequences of unemployment As the level of Unemployment is at a new high, the consequence this is having is becoming more and more obvious. Having a huge workforce willing to work without making good use of them is a waste of resources. This has an impact on factories and manufactures because by not using the labour force they are limiting their ability to produce more goods and provide more services. This would make living standards higher; however these unemployed workers are not being put to work. By not employing workers the government has to pay a state benefit to these people, which is reducing their overall profit. By reducing the government's profit, we are preventing them from spending the profit on improving education, care, transport or health. This effectively limits our standard of living and prevents it from improving. In order for the government to actually prevent themselves from actually losing money they would have to raise taxes to afford to pay for all of the unemployed. Higher taxes rates will reduce people's disposable income and their spending power. A rise in government borrowing may push up the rate of interest, which in turn will also reduce their spending power. As the government has to pay benefits to those unemployed, principally job seeker's allowance it has to reduce spending on health services such as NHS and education.
Discuss whether deflation or inflation is a more serious problem for the economy
Discuss whether inflation or deflation is a more serious problem for an economy (12) To begin with we need to define the terms inflation and deflation. The term inflation is defined as a general and sustained rise in prices. The term deflation is opposite to this and is defined as a reduction in the general level of prices sustained over several months, usually accompanied by declining employment and output. An advantage of inflation for an economy can be it helps smaller firms grow larger. This is beneficial to the economy as it helps unemployment to reduce and increases morale for those smaller firms. Inflation will help firms and individuals who have built up debts as the rate of interest does not fully compensate for the increase in the general price level. This ultimately leads to the real level of debts falling therefore debts become more manageable. A disadvantage of inflation for an economy is a possible loss of competitiveness. For example, if the UK has a higher inflation rate than the rest of the world, its price competitiveness in international markets will fall. A rise in a country's relative inflation rates may lead to a fall in its world share of exports and a consequent rise in import penetration. This ultimately leads to a fall in the rate of economic growth and the level of employment. Another disadvantage of inflation for any economy is the
Is a process of globalisation unifying the world around common interests or is it dividing the world into winners and losers?
Is a process of globalisation unifying the world around common interests or is it dividing the world into winners and losers? William Russell 400148053 Globalisation, simply put, refers to the process by which the world is said to be transformed into a single global system "such that events in one part of the world more and more have effects on peoples and societies far away." (Baylis & Smith 2001, p. 7) However, to use the phrase "simply put" when giving a definition of globalisation may be misleading as there is no simple or agreed definition of what constitutes globalisation, nor any consensus about how far the process has advanced. About all that can be said with confidence about globalisation is that it represents a major site of contestation. The contestation that this essay will focus on is neither whether globalisation in fact exists nor whether it is a new phenomenon. Rather, the focus of this essay is on the impact that globalisation has had on the world. Is globalisation a savior that is uniting the globe? Or is it curse that is dividing us all into winners and losers? The first part of this essay will focus on the question of unity. That is, is globalisation unifying the world around common interests? This question involves looking at the increase in technology and thus the increase in global mass media and communications alike. While the biggest
Market Economies- characteristics and examples.
Market Economy Market Economy- is an economy in which the decision of individuals, firms and the pricing of goods and services are guided solely by aggregate interaction of a country's citizen. In contrast within this system all goods and service a part from pure public goods are provided via the market mechanism. The consumer decided what is to be produced this is done according to consumer sovereignty, their spending/purchasing votes tell producers which goods and service are wanted at a given price and which are not. The mode of production (how goods and service are provided) will be determined via market mechanism. This is simple saying the producers will be anxious to attain the least cost means of production available to them. The key point in production of goods and services is that the buyers and sellers interact in the market on prices and its system. For example if milk is has an short supply but has a high demand towards then adversely it will have a high price attached to it. The price in this case and the demand of the product from people determines decision of what is to be produced or taken. The price in this case acts to indicate the market value of resources. The government has a very restricted part to play in that it should control national defence, act against monopolies, issue money, raise taxes and protecting the rights of the private sector. Examples
Defining Aggregate Demand and Aggregate Supply
Defining Aggregate Demand and Aggregate Supply First of all we need to start by defining Aggregate Demand itself. Aggregate Demand can be defined as the total demand in the economy for goods and services at a given time. The formula for Aggregate Demand is important in that is allows us to look at Aggregate Demand in detail. AD = C + I + G + (X-M) Before we move on we must define the components of this formula. AD is the Aggregate Demand. C is the level of consumption in the economy by consumers. I is the investment that occurs in the economy, done mainly by firms. G is the level of Government investment in the economy. X is the level of exports in the economy, while M is the level of imports in the economy. Now the arrangement of the formula is important too. Firstly we can see that C, I, G and X are positive while the M component is negative. This is because the consumption level will have a positive effect since consumer buying goods raises the money flow in the economy. Investment will also have a positive effect since more companies investing will raise the level of money available as more companies buying factories will have a positive effect since they will be able to buy bricks to build the factory raising demand for bricks. Government expenditure has a positive impact since it means that for example consumers will have more money to spend if G is in the form of
Discuss the effectiveness of expansionary monetary policy in achieving an increase in Aggregate Demand in an economy
Discuss the effectiveness of expansionary monetary policy in achieving an increase in AD in an economy Expansionary monetary policy is monetary policy which is designed to increase aggregate demand. This is achieved, by channelling more savings into investment, therefore if expansionary monetary policy has forced an increase in aggregate demand (AD), and then there will be more capital/ cash available to flow around the country. This increase in aggregate demand is forced by a decrease in interest rates. By decreasing interest rates, it is easier to take out a loan, and therefore people will have more confidence to increase their personal spending. Furthermore, if interest rates fall, homeowners who have variable rate mortgages, will have a much higher amount of expendable cash to spend (as shown in the graph below). Although, in the short run, homeowners using fixed rate mortgages may not be affected to severely, although, with lower interest rates, there will be an increase in mortgage approvals, and may cause an expansion in the housing market. As there is a drop in interest rates, aggregate demand increases, and forces aggregate price levels to increase. Also, the long run aggregate supply will shift right, increasing the real GDP substantially. Although it would be beneficial to have expansionary monetary policy to get money circulating around the economy,
Discuss the economic consequences of unemployment
Discuss the economic consequences of unemployment? In this essay the economic benefits and consequences of unemployment will be discussed. Unemployment can be defined as the percentage of the working age group willing and able to find employment but without work. It can be separated into five categories; cyclical deficient, classical, structural, frictional and seasonal unemployment. There are two methods for measuring unemployment. Firstly, the claimant count measure adds up all those claiming unemployment benefits. It is cheap and easy to collect however; it is not very accurate and exaggerates the unemployed figure as many claimants are untruthful thus exaggerating the unemployment rate. In contrast the International Labour Organisation measure is more expensive but also more accurate. The main advantage of the ILO is that it can be compared with other countries directly. Firstly, unemployment will lead to an economy producing under the PPC showing inefficiency and a waste of resources which will do little good to the basic economic problem of unlimited demand and limited resources. However, unemployment improves labour mobility as there is a greater pool of workers who are keen to gain the necessary skills needed for employment. This benefits the economy as firms have a greater variety of workers to choose from. This increases efficiency as the best skilled workers
What are the main characteristics of a free market economy and a centrally planned economy?
(a) What are the main characteristics of a free market economy and a centrally planned economy? Answers Market economy is about the exchanges between individuals are voluntary and that anyone engaging in such exchanges benefits from them, that means no government interrupts, all the decisions are made by individual firms. For free market economy, we can explain it in 3 expects. First, because households are the 'owners' of productive resources, firms have to pay them for their resources in the resource market, they can produce everything they want, the type and amount of products are determined by every individual firms, but they should produce the goods and service that other companies or household want, and can make the maximum profits, more profits, more motive for the producers. Second, in the resource market, households provide firms with the factors of production (land, labour and capital etc.) they demand in order to produce their output. But, these inputs are not free, so every firm face costs in acquiring them, so when they choose the products they produce, they must consider the cost of the products and production. Every producer is willing to reduce the cost and make the maximum profit. But, this will cause a problem in such situation, there will be some black-hearted producers that use the bad material in the production, like the dirty oil event in China,
Should the Government be Prepared to Increase Spending in Order to Eliminate Unemployment?
Should the Government be Prepared to Increase Spending in Order to Eliminate Unemployment? Government spending can be categorised in two ways: capital or current spending. Capital spending is spending which aims to create future long-term and long-lasting benefits. In the case of the Government, this can include improving infrastructure (roads, telecommunications equipment and so on) - these are things that allow or aid the production and sale of goods and services. Current spending is expenditure which aims to provide things which only last for a limited time. This can include increased wages or salaries. One of those types of spending is much more effective, when it comes to decreasing unemployment; capital spending can cause what is known as a 'multiplier effect'. Should the Government chose to invest in creating a much more efficient road or transport network, there is the opportunity of employment for those with the skills to allow this to happen (builders, engineers, surveyors, etc). The multiplying effect comes into play, when the long term effects of the investment are considered - a more efficient transport network will allow businesses to transport their products more efficiently. The increased efficiency means that the businesses are able to use the saved time/money elsewhere. This again, leads to more opportunity for employment. These newly employed workers
