IFY (YEAR 1)

ASSESSMENT COVER SHEET

STUDENT NAME HAMAD SULTAN AL-THANI

NCUK STUDENT ID 20-0010
MODULE IFY ECO
COURSEWORK 1 / 2
(ETC.)
ECONOMICS

LECTURER/TUTOR MR HOWARD JONES

DATE SUBMITTED JUNE 30TH 2021
OFFICE USE ONLY
DATE RECEIVED

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SIGNED: DATE: JUNE 30TH 2021

 Task 1

Introduction

This essay aims to analyse the best methods to reduce structural unemployment that a
government can achieve using fiscal policy. During this essay, I will highlight the consequences
of structural unemployment on society and the economy. Government interventions in the form
of fiscal policies are used to solve structural unemployment problems in a country. However,
fiscal policies are not the only form of intervention that a government may use. In this essay, I
will compare the available forms of interventions available to alleviate structural unemployment
with diagrams to clarify further the effectiveness of fiscal policy in solving these problems. The
essay will be concluded by suggesting the best method that can be used to solve structural
unemployment in an economy.

Task 2

Discussion

Structural unemployment is a type of automatic unemployment caused by a mismatch between

workers' skills and employers' demands (Ogarkova and Mishchenko, 2019). This type of
unemployment is often caused by changes in technology, causing skills to become obsolete. On
the other hand, frictional unemployment is a type of unemployment where people transition from
one job to another. Unlike structural unemployment, frictional unemployment does not increase
when an economy suffers a recession (Ogarkova and Mishchenko, 2019). During recessions,
people are forced out of their jobs because of redundancy, whereas in frictional unemployment,
people only become jobless when moving from one job to another.

Fiscal policies are measures used by the government to address economic problems such as
poverty, unequal distribution of wealth and unemployment (Eggert and Goerke, 2003). There are
two types of fiscal policies; contractionary policies and expansionary policies. Both these
policies use taxation and government spending to impact the economy depending on their
situation (Eggert and Goerke, 2003).

One disadvantage of fiscal policies when dealing with unemployment is that when the tax rate is
high in a country, this would only worsen the unemployment situation (Ogarkova and
Mishchenko, 2019). This is because businesses will have to spend more money operating,
meaning there will be a decrease in revenue; therefore, businesses will find it harder to expand.
However, fiscal policies can positively affect the level of unemployment in a country if the tax
rate is low. This happens because businesses will now have more finance due to the reduced
spending on materials and products, allowing them to expand and allowing more people to
invest. This means more businesses will start up and expand, providing more jobs for the
community that will reduce unemployment in the long run.
When tax is decreased in a country, this would be considered an expansionary fiscal policy,
increasing the aggregate demand in the economy. Another expansionary fiscal policy is an
increase in government spending (Eggert and Goerke, 2003). This policy increases jobs in an
economy by increasing disposable income because of the tax reduction. Moreover, people have,
which will increase consumption, increasing investments since businesses are now earning more.
Another type of expansionary fiscal policy is increased government spending. This increase in
spending means more services will be provided for the community, such as public transport and
possibly facilities for the community, decreasing costs for citizens and increasing their
disposable income (Eggert and Goerke, 2003)

On the other hand, contractionary fiscal policies are the exact opposite of expansionary policies
(Eggert and Goerke, 2003). Taxes will increase, or government spending will decrease, reducing
consumption and investments in the economy, leading to a decrease in aggregate demand. A
country can use the aggregate supply or demand model to understand better when it should use
expansionary or contractionary fiscal policies.

Another policy that could be used to tackle unemployment is the monetary policy. The monetary
policy affects the money supply by changing the interests rates (Farmer, 2010). For example,
when the interest rate decreases in an economy, borrowing costs will decrease, making more
businesses and people borrow loans, expanding and opening up new businesses after the
decrease (Farmer, 2010). This is because they will now have to return less back to the bank,
meaning is it not as costly to take out loans. This increase in expansions and businesses provide
more jobs decreasing unemployment (Farmer, 2010).

Task3

Charts and Analysis

Cyclical unemployment causes high unemployment rates in an economy, resulting from a

business recession cycle (Ogarkova and Mishchenko, 2019). The business cycle consequence of
the natural rise and fall of the country's economy, or global economy, over some time. As any
phase of a business cycle is temporary, cyclical unemployment is also temporary and is wholly
dependent on how long the economic recession is (Ogarkova and Mishchenko, 2019). Typically,
a recession lasts around eighteen months. Towards the end of this period, a business cycle starts
to re-enter the peak, reducing unemployment.

During the recession, the consumers' propensity to spend decreases and the demand for goods
and services falls. This causes a decrease in production, which means that workers become
redundant as firms start laying them off. Due to joblessness, the workers, who are also the
consumers, have less to spend, which causes a further decrease in the companies' revenue, which
further leads to layoffs as companies struggle to sustain themselves (Ogarkova and Mishchenko,
2019).
Economies are already in recession when cyclical unemployment begins (Ogarkova and
Mishchenko, 2019). Companies usually wait for the recession to become severe before they start
laying workers off. They know this decision will warrant a huge loss in consumption and affect
them adversely. Cyclical unemployment causes stock markets to crash; examples of this are
embedded in history (Ogarkova and Mishchenko, 2019). The economic recession of 1929, the
technology crash of 2000 and the financial recession of 2008 are all famous examples of the
crash of stock markets caused by the recession.

Figure 1 The Business Cycle

In a recessive economy, businesses lose their value as stock markets crash. Investor confidence is
shaken, and nobody wants to risk investing in the market; there is a period of stagnation where
the businesses do not grow. Therefore, with a dive in the stock market, capital investment and
growth opportunities also plummet. This is the contractionary phase of the business cycle.
Economic growth resumes when the investors' confidence grows, which leads to an expansionary
period, reducing cyclical unemployment eventually as businesses start expanding and hiring
more workers to accommodate their needs. Keynesian economists note that an economy is faced
with a "business cycle" throughout its life. A business is a repeated pattern of peak and trough
over time. When the economy is in a trough, Keynes suggests the need to increase economic
activity so that the recession ends sooner.

Figure 2 - Short Run & Long-Run Aggregate Supply Curve

Figure 2 above represents a virile, growing economy. In this economy, the aggregate supply and
aggregate demand are shown to shift every year to the right, and the equilibrium shifts from E0
to E1 to E2. This economy is ideal, as it is producing at its highest possible GDP, and the
inflation growth is minimal. However, the increase in the aggregate supply is not matched with
the increase in aggregate demand, resulting in growth with deflation. The Central Bank, which
the government owns, may use its authority over the banking system to reduce the effects of a
recession in an economy. For example, a fiscal stimulus injected by a government can enforce
the business cycle to stay at its peak for an extended period. If recession persists, the central bank
can use expansionary monetary policy to increase the money supply in an economy by reducing
the interest rates to encourage borrowing, thereby shifting the aggregate demand to the right. If
there is growing inflation, the central bank may use the interest rates to reduce the money supply.
With high interest rates, the overall borrowing will reduce, causing the aggregate demand to fall.

Task 4

Evaluation

Whether it is a monetary policy or fiscal policy, they both have their advantages and
disadvantages in reducing unemployment in an economy. The problem with both policies is that
they have interdependencies with other components of the economy. For instance, in a monetary
policy, interest rates are used to control the money supply. However, if the banks are reluctant to
lend, the borrowing will not be boosted, no matter how low the interest rate is. Moreover,
although the demand side expansionary fiscal policy can reduce the demand deficient
unemployment in an economy, it cannot reduce the supply side unemployment. Therefore, the
policy must consider which type of unemployment is persistent and target the issue specifically.
 Conclusion

Fiscal policies are an effective way of reducing unemployment. This is mainly because taxes
affect many different factors such as disposable income, costs on businesses and consumers. Any
small change in the tax rate can greatly affect an economy, and the fiscal policy controls it.
However, monetary policy affects the circulation of money in an economy which is the biggest
factor in unemployment, making monetary policy the best way to combat unemployment.

References

Eggert, W. and Goerke, L., 2003. Fiscal Policy, Economic Integration and
Unemployment. SSRN Electronic Journal,.

Farmer, R., 2010. How to reduce unemployment: A new policy proposal. Journal of Monetary
Economics, 57(5), pp.557-572.

Ogarkova, A. and Mishchenko, E., 2019. Unemployment: causes, types of unemployment and its
consequences. SCIENTIFIC DEVELOPMENT TRENDS AND EDUCATION, 5.