Question

QUESTION 3 a. „Unemployment is a bad omen for many families as well as the nation at large‟. Discuss the aforementioned statement. b. With the aid of diagrams, explain how fiscal and monetary policies can be used to deal with the problem of unemployment.

Answer 1

Unemployment is never considered as a good omen for any country or individual. Unemployment causes adverse economic and non-economic outcomes.

From the economic perspective, the unemployment leads to a fall in the output level, so the GDP level declines when there is rise in the unemployment rate. Apart from this, other economic hardships arise from the unemployment, people are not able to maintain the high living standard.

further, the social tension also arises from unemployment. The crime rate rises when workers remain unemployed for a prolonged period of time. People begin to lose their faith in the democratic government.

The government needs to follow the expansionary monetary and fiscal policies to correct the recessionary pressure in the economy.

Following is the diagram:

In the above diagram, economy is operating below the full employment at the Y1, government and central bank must follow the expansionary fiscal and monetary policies to raise the level of aggregate demand to reach the full employment level. The aggregate demand curve will shift to right thereby establishing the equilibrium at the Yf which corresponds to the full employment level.