Macroeconomic effect of unemployment Flashcards
Impact on AD and economic growth
KAA1
Knowledge/Analysis:
high unemployment-fall in disposable income-reduced consumption-reduced AD
Reduced AD-increased negative output gap and cyclical unemployment-reduced actual economic growth
Reduction in AD could lead to deflationary spiral
Application:
Consumption (60-65% of UK AD)
2008 Financial crisis saw a lot of unemployment, which led to a decrease in consumption AD and economic growth
Diagram:
Inward shift of AD
Corrective measures
Eval 1
Governement can invest in interventionist supply side policies
and increase potential economic growth:
Investment in infrastructure-increased geographical mobility of labour
Investment in education-more skilled workforce
Healthcare-healthier workforce
Offset effects of unemployment:
Central bank use moneetary policy-reduce-interest rates-increase MPC-increase investment-lead to actual economic growth
If economy is at spare capacity-deflation may not occur
Short run philips curve:high unemployment=low inflation rate
Application:
During Covid-19, interest rates fell to a very low 0.25% to help encourage economic activity
Impact on govt finances and firms
KAA2
Knowledge/Analysis:
High unemployment-lower disposable income-less income tax revenue
Higher unemployment-more spending on benefits-high govt expenditure and other welfare measures
Unemployment means that there’s a low quantity of labour-unemployment means that workers may lose their skills and expertise-reduction in the quantity and quality of labour-inwards shift in LRAS-cost push inflation-reduction in real GDP
Diagram:
Show on graph with AD/LRAS
Application:
One of the UK govt’s macroeconomic objectives is balanced govt finances
The UK’s fiscal position after the COVID-19 pandemic shows a widening budget deficit and increased national debt, highlighting the struggle to maintain balanced finances during periods of high unemployment.
Furlough Scheme- government covered up to 80% of the wages of those who ere unemployed due to COVID-19
Corrective measures
Eval 2
Strategies to increase AD-derived demand for labour-lower cyclical unemployment
Govt can use expansionary fiscal policy-increase govt spending-increase AD-lower cyclical unemployment-higher incomes-higher income tax revenue-improved budget deficit
Bank of England using expansionary monetary policy-cutting interest rates-increased MPC-encourage consumption and investment-also increase AD
Govt invest in training schemes (apprenticeships)-improved quality of labour-outwards shift of LRAS-boosting economic output-improving govt finances-less spent unemployment benefits
Application:
Govt spending is 20-25% of UK AD
Covid 19 saw interest rates drop to 0.25%
