Explain the cause of cyclical (demand-deficient) unemployment.

Discuss the view that the most significant consequence of unemployment is the loss of tax revenue for the government.

Answers may include:

• definition of cyclical (demand-deficient) unemployment
• diagram(s) to show cyclical (demand-deficient) unemployment
• explanation of how cyclical (demand-deficient) unemployment is caused by a fall in aggregate demand
• examples of cyclical (demand-deficient) unemployment.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of unemployment and tax revenue
• diagram to show possible consequence on AD of decreases in government tax revenue and therefore government spending
• explanation of how increased unemployment will decrease tax revenue and may lead to a budget deficit and/or a reduction in government spending
• examples of consequences of unemployment
• synthesis or evaluation (discuss).

Discussion may include: the other economic and personal and social consequences of unemployment, eg loss of GDP, increased cost of unemployment benefits, greater disparities in the distribution of income or an increase in government spending due to falling tax revenues and increased unemployment benefits acting as an automatic stabilizer.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.