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Causes of Demand Deficient Unemployment

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Rachel Gupta

on 6 November 2012

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Transcript of Causes of Demand Deficient Unemployment

By: Rachel Gupta, Monica Shah, Alvina Siu, Erum Syeda Causes of Demand Deficient Unemployment What is it? -Demand Deficient/Cyclical Unemployment results due to a lack of aggregate demand

-also known as Keynesian unemployment as it deals with sticky wages

-associated with transition of the economy through the business cycle

-occurs when economy is not operating at potential What causes a lack of aggregate demand? AD = C + I + + G (x - m) Consumer Expenditure -During a recession there is a
decline in economic activity
-the demand for goods and services will decrease
-firms will produce less to maximize profit
-demand for labour will decrease -consumer expenditure decreases as unemployment increases due to:
-lower disposable income
-lower consumer confidence -cyclical nature
-"Factory closure lowers consumer confidence-retail sales in the area down 5%"
-"Consumers hold back spending; expecting lower future prices" Investment -firms invest less in capital due to low profit levels
-higher corporate taxes
-high interest rates
-"Interest rates soar as government borrows to cover deficit"
-"High corporate taxes force Al's Bakery to stick with old, inefficient ovens" Government Spending -if there is high inflation, the government will reduce spending to try and calm the rising price levels
-less revenue: income taxes
-"City fails to repair pot holes on major roads" Net Exports -if imports increase and exports decrease, aggregate demand for goods and services will fall
-may be due to stagflation (recession and inflation)
-rising exchange rate
-goods from other countries more appealing The End -"Sales on apples from South America pick up"
-"US recession puts Canadian manufacturers in danger with decreasing exports" -if employment is not at full employment, the Keynesian model argues that there is demand-deficient unemployment
-demand-side policies are the solution to move economy to full employment -SRAS decreases from supply disruption
-economy not at full employment
-need to increase AD
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