Types of unemployment:

people at working age who are not employed but actively seeking for a job
Natural unemployment: sum of structural, seasonal, and
frictional unemployment, and cannot be avoided during the
Cyclical unemployment: unemployment arises from development of the economy
insufficient AD Structural unemployment: changes in demand for particular
labor skills, changes in geographical locations of jobs; labor
market rigidities
· Demand-side policy: macro policies aiming to influence · Demand-side policy: little
AD o Monetary policy:
o Monetary policy: demand-side policy aiming to o Fiscal policy:
influence AD by adjusting interest rate and money supply
conducted by central bank
o Fiscal policy: government manipulation in the form of
government spending and tax to influence AD
o Expansionary monetary and fiscal policy:
Reduce interest rate: flexibility, fine tune,
incremental, no influence on budget deficit; time lag,
inflationary pressure, not targeted sector (indirect)
Increase government spending: direct impact on AD,
targeted sector (supply-side effect); time lag (?),
budget deficit (opportunity cost), cannot fine tune,
inflationary pressure
decrease tax: direct impact on the economy, supply-
side effect; inflationary pressure; budget deficit
· Supply-side policy: focus on AS, shift LRAS to the right and · Supply-side policy
promote economic growth o Market-based: labor market reform can effectively reduce
o Market-based: supply-side policy to promote economic structural unemployment resulted from labor rigidities
growth that rely on market forces o Reduction in unemployment benefits and reduction in
Encourage competition (privatization, deregulation): minimum wage can both reduce natural unemployment
trade liberalization may have positive effect on AD o Interventionist:
thus reducing cyclical unemployment o Investment in human capital (education and training) can
Labor market reforms (abolish minimum wage, effectively reduce structural unemployment resulted from
reduce power of labor Union, reduce unemployment mismatch between demand for and supply of the job
benefit): little o Investment in infrastructure (telecommunication) can
Incentive related policies (lower income taxes): reduce frictional unemployment resulted from lack of
disposable income/profit will contribute to information
consumption and investment (AD) o Investment in traffic system can reduce structural
o Interventionist: supply-side policy to promote unemployment resulted from geographical location change
economic growth that rely on government intervention
through targeted sector support
Investment in human capital (education and health)
Investment in infrastructure
Investment in technology
Industrial policies
o Government spending is a component of AD,
interventional policies will definitely contribute to
reducing cyclical unemployment
Direct impact on AD, targeted sector; budget deficit,
efficiency
Types of inflation:
Demand-pull inflation: Cost-push inflation: SRAS decrease due to supply shock
(COVID), changes in wages, oil and other imported energy,
exchange rate changes
· Demand-side policy · Demand-side policy
o Monetary policy: o Monetary policy:
o Fiscal policy: o Fiscal policy:

· Supply-side policy · Supply-side policy

o Market-based:
o Interventionist: government spending
o Market-based: labor market reform (wage increase)
o Interventionist:investment in healthcare service (COVID);
investment in R&D (oil); increase efficiency to offset the
influence of depreciated currency by means of investment in
education and training (XR)
Distinguish between SR and LR economic growth:
SR economic growth: increase in real output (AD) LR economic growth: increase in potential output (LRAS)
· Demand-side policy · Demand-side policy
o Monetary policy: o Monetary policy:
o Fiscal policy: possible supply-side effect (potential o Fiscal policy:
output, inflation)
· Supply-side policy · Supply-side policy
o Market-based: o Market-based:
o Interventionist: o Interventionist: possible effect on AD and inflationary
pressure in the SR