Evaluate The Importance Of Managing Aggregate Dem

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Aggregate demand is defined as the total demand in the economy. The importance of managing aggregate demand in order to bring about a sustained reduction in unemployment depends on your economic view. There are two schools of thought who both have different views on how to reduce unemployment: Keynesian economists and Monetarist economists. Keynesian economists believe that increasing aggregate demand in order to stimulate higher output of goods and services, then leads to an increase in employment. In contrast, Supply side economists believe that unemployment is caused by the supply side of the economy not functioning properly. Extract E states how the recent strong performance of our labour market has “to some extent, been based on a foundation of macro economic stability“. This macroeconomic stability has been reached by using “appropriate fiscal and monetary policies to manage aggregate demand“. The fall in unemployment from 7.1% to 4.7% from 1997 to 2006 shown in Extract D is therefore evidence that managing aggregate demand can contribute to an effective reduction in unemployment. Managing aggregate demand(eg) can be self-financing because when the increase in aggregate demand causes an increase in employment, it means that fewer people would be on unemployment benefits. Therefore, the government has less government expenditure and because more people are employed, the government can collect taxes from more people. However, in order to finance government expenditure the government may also need to increase borrowing and in order to achieve this, the government may have to raise interest rates. This may mean that as a policy, managing aggregate demand may not be self-financing. Managing aggregate demand reduces some types of employment more than others. For example, some people are voluntarily unemployed because they receive more money from benefits

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