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Macro Economic Policies

In: Business and Management

Submitted By zainabdeen
Words 1039
Pages 5
Problem: Decrease unemployment
Fiscal and Monetary/ Short Run Policies (Demand-side policies):
There is a range of policy measures a government may use to reduce unemployment, however, the choice of measures are influenced by the cause of the unemployment, the rate and duration of unemployment and the state of the other macroeconomics objectives.
If the economy is below its productive capacity, unemployment may be reduced by increasing AD. Expansionary fiscal and/ or monetary policy can be used to create jobs.
Fiscal policy: increase government spending and/or cut taxes in order to rise AD. Rise in government spending has the potential to have more of an impact on AD than cuts in tax.
With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity in the economy.) If firms produce more, there will be an increase in demand for workers and therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong economic growth, fewer firms will go bankrupt meaning fewer job losses.
Monetary policy: Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing and encourage people to spend and invest. This increases AD and should also help to increase GDP and reduce demand deficient unemployment.
Also lower interest rates will reduce exchange rate and make exports more competitive.
Supply-side Policies/ Long Run Policies: Education and Training, Reduce Power of trades unions, Employment Subsidies, Improve Labour Market Flexibility, Stricter Benefit requirements, Improved Geographical Mobility
Difficulties:
• It depends on other components of AD. e.g. if confidence is low, cutting taxes may not increase consumer spending because people prefer to save.
• Fiscal policy may have time lags. E.g. a decision to increase government spending may take a long time to have an

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