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Government Policies (Unemployment Policies (Cyclical Unemployment…

- - - - Monetary Policy
        
        Weaknesses
        
        Ineffectiveness in a deep recession
        
        Time lags
        
        Strenghts
        
        Quick implementation and incremental adjustment
        of interest rates
        
        No crowding out
        
        Central bank independence and no political
        constraints.
      - Fiscal Policy
        
        Weaknesses
        
        Political constraints
        
        Crowding out
        
        Time lags
        
        Tax cuts not as effective as government spending
        
        Inability to fine-tune the economy
        
        Strenghts
        
        Pulling an economy out of deep recession
        
        Direct impact of government spending on aggregate
        demand
      - Evaluation: If the economy does not face a deep recession then monetary policy should be applied since it has more advantages than fiscal policy.
  - - - Interventionist Supply Side Measure
        
        Solving Structural Unemployment
        
        Support for retraining
        through grants and low interest loans
        
        Direct government hiring and provision of on-the-job
        training
        
        Setting up retraining programmes
        
        Grants to fi rms offering on-the-job training
        
        Subsidies to fi rms hiring structurally unemployed
        workers
        
        Information on job availability in various geographical
        areas
        
        Grants and subsidies to assist relocation
        
        Government projects in the depressed areas for
        employment creation
        
        Solving Frictional Unemployment
        
        Reducing the time a worker spends
        searching for a job
        
        Improving information flows between employers
        and job seekers,
        
        Solving Seasonal Unemployment
        
        Provision of information to workers on jobs available
        during off-peak seasons in other industries
        
        Disadvantages: negative impacts on the government
        budget and opportunity costs of government
        spending.
        
        Advantages: direct positive impact on employment
        creation, without contributing to increased income
        inequalities and loss of job security
      - Market Based Supply-Side Measures
        
        reducing the minimum
        wage
        
        weaker labour unions
        
        reducing job security
        
        reduction of unemployment benefits
        
        Advantages: reduce the natural
        rate of unemployment without negative effects on
        the government budget
        
        Disadvantages:contribute to income inequality and loss of
        protection for low-income workers.
- - - - fiscal or monetary
        
        fiscal policy
        
        strenghts
        
        Ability to deal with rapid and escalating inflation
        
        Direct impact of gov. spending on AD
        
        weaknesses
        
        Political constraints
        
        Time lags
        
        Unable to fine-tune the economy
        
        monetary policy
        
        strenghts
        
        Quick implementation, incremental adjustment of interest rates
        
        Central bank independence, no political constraints
        
        weaknesses
        
        Conflict among gov. objetives
        
        Inflation requires higher interest rates
        
        increase exchange rate
        
        1 more item...
        
        Time lags
        
        Evaluation
        
        monetary policy is preferred
        
        supply-side policies cannot be used to deal with demand-pull inflation in the short-run
      - Aims to shift AD2 to AD1 and achieve potential output Yp
  - - - Letfward shit of SRAS curve
        
        Higher price level
        
        Fall in real output
        
        Rise in unemployment
        
        Demand-side policies are not a solution
        
        inflation requires decrease in AD
        
        unemployment requires increase in AD
        
        No general solution
        
        gov. with low rate of inflation use monetary policy (raising interest rates)
        
        creates more recession and cyclical unemployment
    - - Solution: supply side policies
        
        Lowers minimum wage
        
        Reduce the power of labour unions
        
        unable to discuss high wage increases with employers
    - - Ex: Oil
        
        No policy: reduce the demand for oil
        
        Lower prices
        
        Rightward shift of SRAS (due to lower cost of production)
    - - break-up monopoly power
      - encoruage competition
      - Solution:
    - - causes increases in prices of imported goods
      - firms depending on imports increase cost of production and cost-push inflation occurs
      - Solution: reduce dependence on imports (expenditure switching policy)
  - - - Such as: low unemployment, ability to respond to supply-side shocks