What this lesson teaches
I can explain how weak growth, unemployment and unstable prices hurt households, firms and governments.
Syllabus 8843, 3.2.2(b). Macroeconomic Issues: Consequences of undesirable economic growth, unemployment and price instability on the standard of living and its implications for economic agents
Make a guess
Unemployment is high, yet many firms say they cannot fill technical jobs. What does this point to?
- Too little spending in the economy.
- Frictional unemployment from people changing jobs.
- A skills mismatch: structural unemployment.
Show the answer
A skills mismatch: structural unemployment.
Jobs and jobless workers exist side by side, so the unemployed lack the skills firms need. Raising demand would not fix it.
Use the evidence to find the cause of a problem, because the cause decides the right policy.
A good diagnosis starts with the outcome, then uses evidence to find the cause.
Is weak growth due to low demand or supply problems? Is unemployment cyclical, structural or frictional? Is inflation demand-pull or cost-push?
The cause decides the cure. Raising AD will not fix structural unemployment, and cutting AD to fight cost-push inflation will deepen a slowdown.
Then trace the effects on each group: households, firms, the government and future productive capacity.
- Rule
- The cause decides the cure.
Worked example: An energy shock and hard-to-fill jobs
Growth is weak and prices are rising. Imported energy costs have risen. Manufacturing vacancies are falling, while specialist technical jobs stay hard to fill.
- Weak growth with rising prices points to cost-push inflation from dearer energy.
- Falling manufacturing vacancies suggest weaker demand for those jobs.
- Hard-to-fill technical jobs point to a structural skills mismatch.
- Policy needs to address both: support for costs or supply, and retraining.
Watch out for this
All inflation should be fought by cutting spending.
If inflation is cost-push, cutting spending deepens the slowdown without fixing the cause.
Check your understanding
Prices are rising while output falls. What is the most likely cause?
- A rise in aggregate demand, which pulls prices up as spending grows.
- A fall in aggregate demand.
- A fall in aggregate supply, such as a rise in costs.
Show the answer
A fall in aggregate supply, such as a rise in costs.
Right. Only a supply shock raises prices while cutting output.