Question

You are hired as an economic advisor for the government of India and you have asked to provide policy recommendations that can change the natural rate of unemployment in India. Explain two policies. Note: you should use examples from our discussions in class.

Answer 1

Policies to reduce natural rate of unemployment are -

• Fiscal policy - Through fiscal policy we can reduce the natural rate of unemployment which also helps to increase the aggregate demand and Economic growth. For this purpose , government needs tonadopt Expansionary fiscal policy by which they will increase their spending and cut the tax rates. So with increase in Aggregate demand there will be increase in real GDP of the country leading to rise in employment fall in unemployment. For example if A company in India increases its production of goods and services they need more workers to full the demand which will automatically reduce the unemployment rate.
• Monetary policy - Through monetary policy , fall in Interest rates due to which there will fall un borrowings and rise in Investment. As a result of which this will increase Aggregate demand and real GDP of the country leading to fall in unemployment rate.