Last updated: July 16, 2019
Topic: LawGovernment
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designed to use government purchases and tax rates to reduce unemployment and stimulate output (Lovewell, 2012). On the other hand, the expansionary monetary policy is designed to use interest rates and money supply to reduce unemployment (Lovewell, 2012). The debate between Keynesians and classical economists is whether fiscal policies can solve both demand and supply side unemployment (Pettinger, 2017). Keynesians believe that the fiscal policy is effective in reducing unemployment (Pettinger, 2017). The theory states that during a recession, the expansionary fiscal policy will increase aggregate demand and increase output, ultimately creating more jobs and reducing unemployment. Meanwhile, classical economists and monetarists believe that while the fiscal policy may cause a temporary increase in real output, in the long run, expansionary fiscal policy causes inflation and does not increase real GDP (Pettinger, 2017). Furthermore, monetarists believe that it is necessary to use supply-side policies which increase the flexibility of labour markets to reduce unemployment. Although Keynesians are correct when discussing demand-deficient unemployment, the fiscal policy cannot solve supply-side unemployment such as frictional or structural unemployment (Pettinger, 2017). Supply-side unemployment occurs when the economy has an abundance of jobs and employers have difficulty finding qualified candidates (Lovewell, 2012). In the expansion phase of the business cycle, workers feel more confident to quit their jobs in search of a better one, resulting in an increase in unemployment (Amadeo, n.d.). When the economy is at full capacity, classical economists are correct, because if the economy is at full employment, and the government pursues expansionary fiscal policy, it will result in an increase in inflation and not reduce unemployment (Pettinger, 2017). Therefore, stabilization policies are not effective in solving all