Macro-Unemployment Flashcards
What is a demand side shock?
Sudden, significant change in aggregate demand
Can be positive or negative
What is a positive DEMAND side shock?
Sudden, significant increase in demand
Increase in economic growth, lower unemployment and possible inflation
E.g. government stimulus pacakage- furlough scheme or Eat out to help out scheme during COVID pandemic /temporary VAT cut
What is a negative demand side shock?
Sudden, significant decrease in aggregate demand
Lower growth, higher unemployment and possible deflation
E.g. financial crisis leading to business spending cuts
What can cause demand side shocks?
Government policies- tax cuts, public spending changes
Changes in consumer confidence - recession
Global events- wars, pandemics
Monetary policy- interest rate changes
What can governments and central banks do to deal with demand side shocks?
Fiscal policies- spending changes/ tax changes
Monetary policies-interest rate/ money supply changes
How could demand side shocks lead to unemployment?
Unexpected rise in interest rates- fall in borrowing and investment
Recession in other country causing export reduction
Sudden decrease in money supply - fall in bank lending - damaging consumption and/or investment
What is a supply side shock?
Sudden and unexpected disruption to supply of goods and services - affecting cost, output and prices
What are positive supply side shocks
Shocks that boost supply
Boost production efficiency
Lower costs
Boost output
What examples of supply side shocks would be positive?
Technology advancements/improvements (e.g. automation/AI)
Falling commodity prices (cheaper raw materials reduce production costs)
Deregulation/ tax cuts - policies that reduce business costs/encourage investment
What are negative supply side shocks?
Disruptions to supply
Reduce productive capacity
Higher costs leading to Inflation
What examples have you got of supply side shocks?
Oil price shocks (or raw materials up in general)
Natural disasters- hurricanes/ earthquakes disrupting supply
War
Labour shortages- strikes or demographic changes
How can government manage supply side shocks?
Monetary policy (e.g interest rate adjustments)
Supply-side policies (education, infrastructure, training, deregulation)- stabilise economy
How can supply side shocks cause structual unemployment?
New technology replacing labour
Open up to trade/ cheap imports
How can supply side shocks lead to other non- structural unemployment?
Unexpected increases to benefits - reduce incentive to work
Unexpected increase in tax, reducing incentive to work
Who can supply side shocks cause real wage unemployment?
Rising trade union power
Drives up wage expectations
Creates a supply demand mismatch
