Sunday 26 April 2009

evaluation: use government policies to cut the unemployment

There are three government policies that we know:
Fiscal policy-fiscal policy is the taxation and spending decision of government.
Monetary policy-monetary policy is central bank and/or government decision on the rate of interest, the money supply and the exchange rate.
Supply side policies-policies designed to increase aggregate supply by improving the efficiency of labour and product market.
Unemployment means people who without work or seek a job over a period of time.
For a short term unemployment, which means the AD goes down, and in order to correct AD, government can use monetary policy,decrease the interest rate. Leading to the company easy to borrow, also decrease the the saving of people, leading to they spending more on goods. But if they decrease the interest rate which means the exchange rate decrease as well, so the injection increase a lot, will boost the AD increase a lot and then leading to demand pull inflation(draw a diagram) then,government will deal with this problem, the unemployment may increase again, therefore is difficult to measure. . Government may use fiscal policy as well, increase government spending and decrease for example,use taxes and subsidies(draw a diagram.) as a method of influencing the market price of a product, a low tax is placed on a merit goods, it may increase the demand .and spending more to encourage some small firm as well. But because of a high government spending increase the leakage, and low tax, increase the disposable income per capita, this way also rapid the increase of demand,leading to the inflation as well. So this is also difficult to measure.
About long term which is we need mention AS, and if the AS increase it helps reduce the unemployment .use the supply side policies to cut the unemployment, such as encourage small firm, decrease the power of trade union, low tax, and increase investment etc. Decrease the power of trade union, the cost of wage for employees will not increase. But employees do not have high wages they may do not work very hard, or leave your company, the out put will decrease. Also increase of subsidies fro employees and increase the investment, increase subsidies by government can help the company reduce their cost, also government will decrease the interest rate to easy lent money to investment, and increase investment can cut the cost of supply and increase the output. But the problem like I said above, it might increase the inflation, but this time is cost push inflation.(draw a diagram)

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