HOW TO REDUCE UNEMPLOYMENT RATE AND KEEP THE PRICE LEVEL LOW

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Subject: Mathematics and Economics
HOW TO REDUCE UNEMPLOYMENT RATE AND KEEP THE PRICE LEVEL LOW
Both fiscal and monetary policies can be used to reduce unemployment rates in the short run while maintaining stable prices of goods and services. This is an economy experiencing recessionary gap and either of the two policies will stimulate growth and reduce unemployment levels without devaluing the currency.
Employing fiscal policies of cutting taxes and increasing government spending during recession will increase aggregate demand, AD, for goods and services hence creating a fiscal multiplier effect on the economy and this will create more jobs and reduce unemployment.
The central bank in this economy should therefore employ fiscal policy by cutting down taxation and increasing government spending to inject more money in the economy which will be invested to create more employment opportunities. However, more money in the economy may result inflationary pressure and may push the prices of goods and upwards.
Increased government spending and reduction in taxation means less money is available to finance the expanded budget leading to budgetary deficit which may force the government to borrow money to finance its expenditures.
Reducing tax levied on businesses and individuals in this economy will leave them with more money to spend which increases consumer demand for goods and services in the economy experiencing recession. Increased money supply and consumer demand may lead to a decrease in the value for money hence reducing its purchasing power hence pushing the rate of inflation and prices of goods and services upwards.
Decreasing taxation increases spending power of consumers and supported with increase in government spending through government buying of more services from the economy market like building roads and schools creating more jobs and wages. This money is in turn pumped in the economy “pump priming” leading to economic growth and reducing overall unemployment levels.
Increased money in economy in turn reduces the demand for credit facilities further pushing down the cost of credit, interest rate resulting into more borrowing for investment which in turn creates employment opportunities.
However, fiscal policies can only reduce unemployment levels resulting from the reduced aggregate demand for goods and services but cannot solve unemployment resulting from reduced aggregate supply. Structural and frictional unemployment cannot therefore be solved by fiscal policy interventions for they come from the supply side of goods and services.
This economy is in recession and unemployment is caused by reduced demand for goods...