Cyclical Unemployment

By: Miles, Tony, Daniel, Maxime, Sophie and David

Introduction (Miles)

● Cyclical unemployment is caused by low or falling aggregate demand (AD)

during downturns in the business cycle.
● It can be corrected by expansionary demand-side policies, monetary policies, or
fiscal policies.
● The intended effects of the following policies are moving from a recessionary
gap to potential output (YP)
● The government or central bank shift the aggregate demand to increase RGDP.
As AD shifts, the recessionary gap shrinks and cyclical unemployment shrinks as
well, until it is gone at YP
 Expansionary Monetary Policy (Tony)
Expansionary Monetary Policy
- Incremental adjustments and easily
reversible.
- No political constraints and shorter
time delays compared to fiscal policy
- Does not lead to
crowding out” or increased
government spending.
Interventionist Supply-side Policies
- Could be effective as they have
demand-side effects.
- The increased demand (rightward shift
of AD) will
Crowding out refers to a situation in which increased
government spending leads to reduced investment or
consumption in the private sector.
 Expansionary Fiscal Policy (Maxime)

- Can complement monetary policy, particularly in deep recessions.

- Direct impact on aggregate demand, especially through increased
government spending.
- Targeted spending on infrastructure can have supply-side effects on
potential output.
- Automatic stabilizers like progressive taxes and unemployment
benefits mitigate severity of recession and cyclical unemployment.
 Disadvantages of Monetary Policy (Daniel)

May be Ineffective in Deep Recessions

● Low consumer and producer confidence means that C

and I may not increase even if interest rates decrease,
as they have a pessimistic outlook on future economic
conditions
● Interest rates cannot continue to fall as they approach
zero
● Banks may not lend money as they are fear that
borrowers will be unable to return their loans
Disadvantages of Monetary Policy (cont’d)

May Lead to an Inflationary Gap

 Disadvantages of Fiscal Policy (David)

- Lower interest rates may not spur aggregate demand in deep

recessions due to low consumer and business confidence
- Ineffective once interest rates reach zero.
- Cannot fine tune the economy and is subject to major time
lags
- Government has a budget deficit resulting in increased
government debt.
- Leads to higher interest rates possibly crowding out private
investment
 Policies that are not Recommended (Sophie)

Market-based supply-side policies focuses more on potential output while cyclical

unemployment is due to insufficient aggregate demand. Due to this, market-based
supply-side policies will not help reduce cyclical unemployment.

The policy that has demand-side effects is the interventionist supply-side policies
which can then be effective in resolving cyclical unemployment.
Thank you for Listening !