The purpose of tight fiscal policy is:

• Reduce inflationary pressure by reducing the growth of aggregate demand (AD) in the economy

• Improve government finances by increasing tax revenue and reducing government spending.

Fiscal policy is likely to be tightened when the economy is growing quickly and in danger of overheating (e.g. if economic growth is above the long run trend rate of growth). However, tight fiscal policy may need to be implemented if government finances are poor and there are fears over the size of government debt.

Side Effects of Tight Fiscal Policy

• Higher tax rates may create disincentives to work

• Lower government spending may lead to under provision of public goods and public services

• Improvement in government fiscal position may help reduce bond yields on government debt, which can have beneficial effects for long term investment.

UNIT 20 UNEMPLOYMENT

Unemployment as defined by the International Organization, occurs when people are without jobs and they have actively sought work within the past four weeks. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.

There remains considerable theoretical debate regarding the causes, consequences and solutions for unemployment. Classical, neoclassical and the Austrian School of economics focus on market mechanisms and rely on the invisible hand of the market to resolve unemployment. These theories argue against interventions imposed on the labor market from the outside, such as unionization, minimum wage laws, taxes, and other regulations that they claim discourage the hiring of workers.

Keynesian economics emphasizes the cyclical nature of unemployment and potential interventions to reduce unemployment during recessions. These arguments focus on recurrent (повторяющиеся) supply shocks that suddenly reduce aggregate demand for goods and services and thus reduce demand for workers. Keynesian models recommend government interventions designed to increase demand for workers; these can include financial stimuli, job creation, and expansionist monetary policies.

Marxism focuses on the relations between the controlling owners and the subordinated proletariat whom the owners pit (натравливают) against one another in a constant struggle for jobs and higher wages. This struggle and the unemployment it produces benefit the system by reducing wage costs for the owners. For Marxists the causes of and solutions to unemployment require abolishing capitalism and shifting to socialism or communism.

In addition to these three comprehensive theories of unemployment, there are a few types of unemployment that are used to more precisely model the effects of unemployment within the economic system. The main types of unemployment include structural unemployment which focuses on structural problems in the economy and inefficiencies inherent in labor markets including a mismatch between the supply and demand of laborers with necessary skill sets. Structural arguments emphasize causes and solutions related to disruptive technologies and globalization.

Discussions of frictional unemployment focus on voluntary decisions to work based on each individuals' valuation of their own work and how that compares to current wage rates plus the time and effort required to find a job. Causes and solutions for frictional unemployment often address barriers to entry and wage rates. Behavioral economists highlight individual biases in decision making and often involve problems and solutions concerning sticky wages and efficiency wages.

Cyclical or Keynesian unemployment, also known as deficient-demand unemployment, occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Demand for most goods and services falls, less production is needed and consequently fewer workers are needed, wages are sticky and do not fall to meet the equilibrium level, and mass unemployment results.^[57] Its name is derived from the frequent shifts in the business cycle although unemployment can also be persistent as occurred during the Great Depression of the 1930s. With cyclical unemployment, the number of unemployed workers exceeds the number of job vacancies, so that even if full employment were attained and all open jobs were filled, some workers would still remain unemployed. Some associate cyclical unemployment with frictional unemployment because the factors that cause the friction are partially due to cyclical variables. For example, a surprise decrease in the money supply may shock rational economic actors and suddenly inhibit aggregate demand.

UNIT 19 COMPARATIVE AND ABSOLUTE ADVANTAGE