The economy can be altered if poor government policies are implemented. The goals of any economic policy by the government mainly aim at curbing the problems of inflation and unemployment. While taking care of factors that would ensures a steady reduction of unemployment and inflation, government policies also ensure that the GDP increases at an average of about 3% each year. This trend is only ensured with the application of the right policy mix and a good timing of all variables. This paper looks at two major economic conditions. The first condition is when the country is within an economic period of high unemployment, interest rates that are almost zero, and inflation rate of about 2 percent per year. The GDP in this first case is at a growth rate of less than 2%. The second case is when the country is in a budget deficit.

During a period of high unemployment, chances are that inflation is low. According to the Philips curve, inflation and unemployment are negatively related in that decreasing unemployment causes an increase in inflation (Hoover, 2008). Monetary policies applies monetary stimulus from a country’s reserves. In this case, money supply is increased in the economy to influence interest rates. When money supply is high, interest rates decrease making investment cheap. Cheap investment increases investments and businesses in the economy, which forms grounds for employment opportunities. To maintain the level of inflation, the government has to come up with a way of reducing individual spending by increasing income tax on individual salaries and wages (Jordà, 2005). This aspect would cut people’s purchasing power so that their aggregate demand reduces accordingly. Inflation is mainly caused by an increased aggregate demand, which causes an increase in the general price level. The general increase in price level can be curbed by introducing the fiscal policies. The call for the use of fiscal policy comes in when any attempts to stimulate demand by reducing interest rates to make capital more affordable, more workers are employed in the economy. Demand is then increased given that the market has more buyers for the increased aggregate supply in the economy.

The fiscal policies work best in economic situations where the monetary policies do not work effectively. Since the interest rates have been influenced through, money supply to make investment achievable, more employment opportunities are generated thereby reducing the problem of unemployment. The issue that the government would have to face is how to maintain the same level of inflation at a rate of 2%. The government initiates fiscal policies that would maintain the same level of aggregate demand. While the effect of monetary policy is immediate and taking effect in the short-run, the fiscal policy and its effects may be realized in the economic long-run but the core aim of the policies is to maintain a low level of inflation and reduce the high unemployment rate in the economy (Jordà, 2005). In this case, the government considers an assumption that the nominal wages in the economy remain constant when the policies are being initiated (Jordà, 2005). Since the unemployment has reduced, it means that the economy has more buyers of economic goods and services in form of an increased aggregate demand. The role of the government in this case is to frame a way of cutting down the increased aggregate demand while holding the reduced level of unemployment constant.

The government would decide on cutting down individual buyers in the economy by increasing taxes so that individual demands for goods and services are reduced in the economy. This aspect of fiscal policy makes producers maintain the same level of productivity, would sustain the immediate employment level while maintaining a low level of inflation. Through the fiscal policies, the government can hire workers through various job programs (Amadeo, 2013). Taxation would have no direct effect on investment since its aim would be to maintain. Tax increment is however harmful and workers would be pressured by the decrease in their net income. This could therefore lead to an increased unemployment in the end in the form of voluntary unemployment. Some workers may find it better to be unemployment than going through the income reduction through increased taxation.

Unemployment can therefore be reduced through employment benefits, and funding education. Funding education boosts human capital and worker productivity to increase aggregate demand. Since the productivity level is high, firms would increase supply so that the market equilibrium remains constant maintaining the prevailing price level in the economy (Amadeo, 2013). This aspect is likely to maintain the inflation rate at 2%.

Given a situation whereby the country is having a budget deficit, in which case it carries a very large debt, the GDP of the country is faced with several problems associated with the economy. Trade balance is one of the key components of GDP and if the balance is negative, it means that the potential GDP is decreased as well. In general, terms, in an economy that is open, trade balance with a surplus causes an increase in GDP while a deficit causes a decrease in GDP (Piana, 2006). In the aspect of financial aspects of the economy, balance of trade influences the current account balance and its composition. Debts in the trade balance are caused by a trade balance that is long lasting. Large debts influence capital inflow thereby extending its effects on investment and unemployment increase (Piana, 2006). This aspect influences the monetary policy used to control unemployment in the economy.

 

References

Amadeo, K. (2013). Unemployment Solutions. Retrieved March 18, 2013, from About.com          Guide: http://useconomy.about.com/od/suppl1/p/Unemployment-Solutions.htm

Hoover, K. D. (2008). Phillips Curve. Retrieved March 18, 2013, from econlib.org:             http://www.econlib.org/library/Enc/PhillipsCurve.html

Jordà, Ò. (2005, May 20). Can Monetary Policy Influence Long-term Interest Rates? Retrieved     March 18, 2013, from FRBSF Economic Letter:          http://www.frbsf.org/publications/economics/letter/2005/el2005-09.html

Piana, V. (2006). TRADE BALANCE. Retrieved March 18, 2013, from       economicswebinstitute.org:             http://www.economicswebinstitute.org/glossary/tradebalance.htm

---

 

PLACE THIS ORDER OR A SIMILAR ORDER WITH GRADE VALLEY TODAY AND GET AN AMAZING DISCOUNT

---

The post Unemployment Solutions detailed discussion appeared first on Grade Ninjas.

Welcome to originalessaywriters.com, our friendly and experienced essay writers are available 24/7 to complete all your assignments. We offer high-quality academic essays written from scratch to guarantee top grades to all students. All our papers are 100% plagiarism-free and come with a plagiarism report, upon request

Tell Us “Write My Essay for Me” and Relax! You will get an original essay well before your submission deadline.