Fiscal Policy for Reducing the Unemployment Rate

Topics: Macroeconomics, Keynesian economics, Inflation Pages: 3 (717 words) Published: April 28, 2013
Fiscal Policy for reducing the unemployment rate

The employment rate is quite an important variable to a country because it represents the country's economic situation is good or bad.In order to reduce the unemployment rate,both demand side policies and supply side policies can be used.On the demand side,there are fiscal policy and monetary policy.While on the supply side,there are many policies like improving labor market flexibility,employment subsidies,better education and training,lower employment benefits and so on.Since i focused on variables about employment rates in the group work,i'm going to explain how fiscal policy helped to reduce the unemployment in this paper.

Fiscal policy is one of the macroeconomic policies which can influence resources allocation, redistribution income and reduce the fluctuation of the business cycle, by varying the amount of government spending and revenue.Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth. The government will need to pursue expansionary fiscal policy, this involves cutting taxes and increasing government spending. Lower taxes increase disposable income and therefore help to increase consumption, leading to higher aggregate demand.With an increase in aggregate demand,there will be an increase in real GDP.If firms produce more,there will be an increase in demand for workers and therefore lower demand-deficient unemployment.In addition,with higher aggregate demand and strong economic growth,fewer firms will go bankrupt.Therefore,job losses are fewer.

Since lower taxes lead to higher AD,real GDP increase from 1→2.And higher government expenditure also increase the real GDP from 1→2.Therefore unemployment rates will be lower.

In addition,expansionary fiscal policy can also close the recessionary gap.It is used to address business-cycle instability that gives rise to the problem of unemployment.A recessionary gap exists if the...
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