“When a government wishes to lower unemployment its only method of reducing it is by the use of the use of fiscal policies” Do you agree with this opinion? (A level Economics, Paper 4, June 2014)

 Ans:

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The government’s aim is to lower the rate of unemployment in a country. In this case, higher the aggregate demand in the economy can inject more employments. An injection of employment has multiplier effects that lead to an increase in GDP and national income.  Prices and employment will be increased in order to meet the rising demand.
The government can use expansionary fiscal policy to maintain a high level of aggregate demand. The expansionary fiscal policy includes raising government expenditure and lowering the tax rate. People's disposal income may increase if the government reduces the tax rate, and people buy more goods or services. So the rising demand for goods and services off courses leads to an increase in the demand for labor. Besides, the rising demand would raise the total output. Raising demand and price are shown in the figure.  




Another side is government expenditure. The government should support all public projects and expand new projects in order to increase new job opportunities. These provide strong supports to improve aggregate demand. In this measure, the government must keep a balance between expenditure and taxation. But these policies are used to control the aggregate demand of an economy. If the government uses the spending for human capital development it will reduce unemployment.          
However, on the other hand, the government can also use monetary policy instead of fiscal policy to achieve the same target. In monetary policy includes money supply and interest rate. To achieve the result the government can use various quantitative and qualitative tools to increase the supply of money and lower the interest rate. This measure will boost business investments as well as consumer expenditure. The central bank of a country can lower its lending rate and relax regulations for giving loans or mortgage loans in order to stimulate aggregate demand as well as new employment.
Direct control policies are necessary. The government can reduce the saving contributions arranged by employers and employees. The government can allow at lower age for compulsory pension funds withdrawals. And some certain goods or services like maintenance are compulsory to consume regularly.   
In the long term, the effective supply-side policy can reduce the unemployment problem. The main aim of the supply-side policy is to increase aggregate supply in each sector of the economy. Raising aggregate supply can obviously increase GDP and employment. Employees can be more skilled and productive due to proper training and education. Some anti-trade union laws also encourage the firms to invest new products and services. As a result, employment opportunities in the economy will be increased.    
Also proving the flow of information can remove frictional unemployment as they can search for another new job immediately.

So, in conclusion, fiscal policy is not only a measure to reduce unemployment. In fact, the government can choose the different measures accounting for the type of unemployment problems.




M. Anwar Hossain 
Senior Teacher ( A & O Level )
Call: 01676514507