Explain why cyclical (demand-deficient) unemployment may occur in an economy.

Evaluate the effectiveness of interventionist supply-side policies in reducing the level of unemployment in an economy.

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

Answers may include:

• definition of unemployment, cyclical (demand-deficient) unemployment
• diagram to show cyclical (demand-deficient) unemployment 
• explanation of how cyclical (demand-deficient) unemployment is caused by a fall in AD, which may arise from a fall in any or all of the components of AD (C + I + G + X − M)
• examples of cyclical (demand-deficient) unemployment occurring in practice.

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

Answers may include:

• definitions of unemployment, interventionist supply-side policies
• diagram showing LRAS shifting right and/or supply of labour increasing in a labour market diagram; candidates may also show AD shifting right as a short-term effect of supply-side policies
• explanation that interventionist supply-side policies increase the quantity and quality of factors of production and thus increase the productive capacity of the economy and can be targeted at particular sectors of the economy; this may help to reduce structural unemployment in the long term and also contribute to the reduction of demand-deficient unemployment in the short term through the impact on AD
• examples of interventionist supply-side policies helping to reduce unemployment in practice 
• synthesis or evaluation.

Evaluation may include: the importance of the type of unemployment (e.g. demand-deficient unemployment may be more directly reduced through expansionary monetary and fiscal policies); consideration of the effectiveness of supply-side policies (e.g. in terms of time lags, the ability to create employment, the impact on the government’s budget deficit, opportunity cost); government investment in new technologies (e.g. robotics/artificial intelligence) may lead to displacement of labour.

There were some very strong answers to this question, with many students explaining how cyclical unemployment occurs during a recession when aggregate demand falls, and unemployment rises. These answers were effectively illustrated with aggregate demand and supply diagrams. Real-world examples often prove more difficult for students in macroeconomic questions, but there were still some effective examples from different countries where unemployment has increased because the current pandemic (at the time of writing) caused recession and a fall in aggregate demand. 

This question also produced some effective responses, with candidates showing a good understanding of the way interventionist supply-side policies can reduce unemployment. The strongest answers considered how state-provided education and training, employment subsidies and government-financed employment exchanges can reduce different types of unemployment. The answers were illustrated by showing an increase in the long-run aggregate supply curve, along with real-world examples of the use of interventionist supply-side policies. Large numbers of students evaluated their answers by considering the costs and relative effectiveness of the interventionist supply-side approach. The best responses also discussed the relative merits of alternative policy options such as monetary and fiscal policy, along with a market-based supply-side approach.