Evaluate the importance of managing aggregate demand to bring about a sustained reduction in the rate of unemployment in the UK economy
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Aggregate demand is the total demand for country’s goods and services in a given price level over a period of time. Formula is AD=C+I+G+(X-M).
If the economy is experiencing high level of unemployment, government is likely to boost the aggregate demand by different demand-side policies. Increase of any component of aggregate demand will lead to an outward shift of the AD curve. One of the effective ways of reducing unemployment is cut in interest rates. As we know investment is the function of interest rates. Therefore it would lead to an increase in investment. Part of the borrowed money people would invest for opening new businesses, therefore creating new jobs for unemployed. Also government can use expansionary fiscal policy. Increase government spending and decrease taxes. All the above would lead to an increase in AD and therefore created jobs would reduce unemployment. However if AD would rise too fast it may cause demand-pull inflation.
As you can see above the demand pull inflation.
Therefore reduction of unemployment would be unsustainable. For that reasons managing AD is very important in order to maintain stable and low inflationary growth.
Also increase in Aggregate Demand wouldn’t reduce frictional, voluntary or structural unemployment. Frictional unemployment (looking between jobs). Structural unemployment. - People without the right skills for the labour market. Voluntary unemployment - when benefits are too high they encourage people to remain on benefits rather than work.
In conclusion I’d like to add that to maintain sustainable economics growth with low rate of unemployment it is necessary to use both demand-side and supply-side policies.
If the economy is experiencing high level of unemployment, government is likely to boost the aggregate demand by different demand-side policies. Increase of any component of aggregate demand will lead to an outward shift of the AD curve. One of the effective ways of reducing unemployment is cut in interest rates. As we know investment is the function of interest rates. Therefore it would lead to an increase in investment. Part of the borrowed money people would invest for opening new businesses, therefore creating new jobs for unemployed. Also government can use expansionary fiscal policy. Increase government spending and decrease taxes. All the above would lead to an increase in AD and therefore created jobs would reduce unemployment. However if AD would rise too fast it may cause demand-pull inflation.
As you can see above the demand pull inflation.
Therefore reduction of unemployment would be unsustainable. For that reasons managing AD is very important in order to maintain stable and low inflationary growth.
Also increase in Aggregate Demand wouldn’t reduce frictional, voluntary or structural unemployment. Frictional unemployment (looking between jobs). Structural unemployment. - People without the right skills for the labour market. Voluntary unemployment - when benefits are too high they encourage people to remain on benefits rather than work.
In conclusion I’d like to add that to maintain sustainable economics growth with low rate of unemployment it is necessary to use both demand-side and supply-side policies.
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