ECO 2104: Macroeconomic Analysis of US Unemployment & Fiscal Policy

This report examines the types of unemployment in the U.S., particularly focusing on the cyclical unemployment experienced during the 2008 recession. It discusses the impact of reduced demand on manufacturing and construction sectors, leading to layoffs and underemployment. The report further analyzes fiscal measures, such as expansionary fiscal policy (tax cuts and increased government spending), that the U.S. government could implement to address unemployment, using the AD-AS model to illustrate the effects of these policies on aggregate demand and GDP. It references the Keynesian Multiplier Effect and emphasizes the importance of combining tax cuts with increased government spending to stimulate economic recovery. The report also touches upon the potential for structural unemployment arising from prolonged periods of joblessness and skill gaps.

Running head: PRINCIPLES OF MACROECONOMICS
Principles of Macroeconomics
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PRINCIPLES OF MACROECONOMICS
(i) Based on the news clip, list and explain the main type of unemployment in U.S
during this period.
In 2008, United States had a massive loss of unemployment and the number starting
growing as the initial claims were troublesome . The recession signal was concentrated
majorly in manufacturing and construction and this loss of unemployment experienced
reduction in demand for goods and services because of cyclical unemployment. In this type
of employment, the firms need to adjust with the business either by cutting the hours of
qualified employees or provisionally laying off the skilled workers. In recession, if the
demand started to revive, the firms are not in position to hire more workers as there is lack of
skilled labourers resulting in collapse of aggregate demand. As per Levine (2013), the
number of workers working involuntarily below the 35 hours a week has been doubled for
the industries like financial activities industries and construction industries, which further
paved the path for the collapse of house market in 2007-2009. Soon, the underemployment
with stagnant unemployment rate as 5.5% had been hitting every sector leading to economy
wide reduction in demand and being the contributor of increase in loss of jobs (Isidore,
2008). This even led to onset of structural unemployment later as the unemployment rate had
increased from 5% in December 2007 to 10% in October 2009 and these anomalies of factual
data was the cause of permanent loss of job for the workers by creating a direct association
between job vacancies and unemployment. The provisional lay offs had become permanent in
2008-2010, with creating a wedge between the employee and employer relationship and the
forceful actions of firms to look for new opening as the lack of skill set led to lengthy
unemployment (Classen and Dunn 2012).
(ii) Discuss with relevant diagram on the fiscal measures that can be imposed by U.S
government in order to overcome the above type of unemployment.
Fiscal is a word that can be related to budget decisions. However, many Keynesian
economists believe that recession is a stage in business cycles lead the way to cyclical
unemployment which are mainly due to low aggregate demand. On the other hand, fiscal
policy gives rise to many strategies that helps in deploying the government budge to increase
or decrease the aggregate demand (Mankiw 2014). Fiscal policies can be either expansionary
and contractionary in nature depending on the nature to increase or decrease the aggregate
demand in the economy.

E1
LRAS SRAS
AD0
AD1
P
1
P
0 E0
Y
0
Y1 Real GDP
Price
PRINCIPLES OF MACROECONOMICS
Expansionary fiscal policy helps in increase in level of aggregate demand by two
methods that is reduction in taxes or rise in government spending. The following ways would
be by increasing investments by increasing the “Net Income after Tax” in businesses or by
increasing the government purchases through spending on final goods and services or else by
increasing the consumption through net disposable income with cutting the payroll/ personal
taxes (Taussig 2013). On the other hand, contractionary fiscal policy decreases the level of
aggregate demand either by imposing taxes or decreasing the government expenditures. This
would further imply decreasing the consumption, restraining the investments and imposing
payroll/ personal taxes further. Also, one factor that can increase the aggregate demand is use
of Keynesian Multiplier Effect which works as the same fashion as decreasing taxes. The
cutting in taxes will make the consumer buy more goods and services and this would make
the firms to hire more employees for producing those goods and services which in turn leads
to purchase while increasing the aggregate demand (Mankiw 2014).
Nonetheless, in times like recession, expansionary fiscal policy is used. When
considered, the recession undertaken in USA in 2008-2009, the AD-AS model can be the best
indicator in describing the phenomenon. In addition, out of the two methods, it is important
that a combination of tax cut and increase in government spending should be undertaken.
This is because the state and local governments are even affected by the recession and this
would help in paying the borrowed money/ loans and bills and recovery can be experienced
by buying fewer goods and services and raising taxes.

PRINCIPLES OF MACROECONOMICS
Figure: Expansionary Fiscal Policy
Source: (Mankiw 2014)
Diagrammatically, it can be explained that during recession, the equilibrium E0 is
taking place where AD0 and SRAS are intersecting highlighting that the economy is below
the potential GDP level. In this case, if there is decrease in taxes or increase in government
spending through investments, then the rightward shift in AD as AD1 can increase the level
of potential GDP, closer to the full employment level where the economy can operate.
Moreover, a mixture of increased government spending and tax cut will increase the level of
price but the difference would be relatively small as undertaken by US economy in the
scenario of recession from 2007-2010.

PRINCIPLES OF MACROECONOMICS
References
Classen, T.J. and Dunn, R.A., 2012. The effect of job loss and unemployment duration on
suicide risk in the United States: A new look using mass‐layoffs and unemployment duration.
Health economics, 21(3), pp.338-350.
Isidore, C., 2008. Job losses continue for sixth straight month - Jul. 3, 2008. Retrieved from
https://money.cnn.com/2008/07/03/news/economy/jobs_june/index.htm?
postversion=2008070310
Levine, L., 2013. The Increase in Unemployment since 2007: Is It Cyclical or Structural?.
Current Politics and Economics of the United States, Canada and Mexico, 15(3), p.345.
Mankiw, N.G., 2014. Principles of macroeconomics. USA: Cengage Learning.
Taussig, F.W., 2013. Principles of Economics (Vol. 2). New York: Cosimo, Inc..