Question

Explain how the unemployment rate can be associated with a decrease in demand, which can be caused by a decrease in money and credit. Explain also how unemployment can be caused by factors other than changes in demand.

Answer 1

The decrease in demand refers to the situation of recession which occurs due to fall in aggregate demand and overall GDP. The banks may increase the interest rates which decreases the money supply available in an economy. As money supply decreases, the households and firms will borrow less and consumers will consume less which decreases the demand and decrease the profit levels of the firms. This will induce the firms to cut down on their production and hire less workers which will raise the unemployment rate.

This particular principle can be studied with the help of AD/AS curve

The AD/AS model refers to the aggregate demand and aggregate supply curve in the following diagram:

As demand decreases from AD1 to AD2, the GDP decreases and hence unemployment rises.

The unemployment is also caused due to other factors other than fall in demand which are supply side related as follows:

Frictional: this type of unemployment occurs when people are in between jobs for example when a college passout search for jobs,he may be unemployed for some time.

Structural: this type of unemployment occurs when jobs are available but people don't have right skills to be hired for it example people working in mines may not have the right skills to work in a bank after they get unemployed.

Seasonal: it refers to the situation when people are unemployed at particular times of the year because demand for labor market is low. This mainly occurs in the tourist season for after it is over, alot of workers will not be able to work for few months.

Voluntary: it occurs when the jobs are available in the market but the people are not ready to work at low wage rate and rather stay unemployed or when people hope to find a job more suited too their skills.