Macroeconomic Policy Tools: Unemployment, Cycles, and Fiscal Strategy

Economic Consequences of Unemployment

• Decreased aggregate demand.
• Increase in the public deficit.

Social Effects of Unemployment

• Negative psychological effects.
• Discrimination.

Factors Influencing Unemployment

• Demographic factors.
• Technological changes.
• Openness to international trade.
• Phase of the economic cycle.

Policy to Combat Unemployment

• Act on the Aggregate Demand (DA).
• Act on the Aggregate Supply (OA).

9.5. The Economic Cycle

The economic cycle involves fluctuations in Gross Domestic Product (GDP) and employment, driven by factors leading to expansion and recession.

Phases of the Economic Cycle

• Expansion
• Peak
• Recession
• Trough (Background)

10.1. State Intervention in the Economy

Keynesian Economists

Followers of J.M. Keynes:

• They reject the hypothesis that the economy naturally tends toward full employment.
• They recommend state intervention to stabilize the economy through:
  • Monetary policy.
  • Fiscal policy.
• They advocate increased government spending to combat economic depressions.

Classical and Liberal Monetary Economists (Monetarists)

• They trust the free play of market forces to bring the economy near full employment.
• They believe the economy adjusts itself when deviating from long-term growth.
• They advocate minimal state intervention: Monetarists primarily focus on controlling the money supply.

10.2. Fiscal Policy

Fiscal policy is the government's use of public spending and taxes to generate specific effects on the economy.

Public Expenditure

The government modifies public expenditure to influence the relative magnitude of collective consumption versus private consumption.

Types of Public Expenditure

• Running costs (Current expenditure).
• Investment costs (Capital expenditure).

Taxes

Taxes are the amounts that families and companies pay to the public sector for various items specified in law, such as:

• Obtaining returns (Personal Income Tax - PIT).
• Consumption of goods (Value Added Tax - VAT and Special Taxes).
• Obtaining benefits (Corporate Tax - IS).

Objectives of Taxation

• To cover public expenditure.
• To decrease the production and consumption of certain goods.
• To modify the distribution of income.

Consequences of Fiscal Policy

The consequences of fiscal policy are determined by its implementation (see Budget section).

10.3. The Public Sector Budget

Description

The public sector budget is a document outlining the plans for public sector expenditures and the revenue necessary to fund them during a fiscal exercise.

Budget Balance

The budget balance is calculated as: Revenue - Public Expenditure.

Budget Outcomes

• If Income > Expenditure: Budget Surplus.
• If Income < Expenditure: Budget Deficit.
• If Income = Expenditure: Balanced Budget.

Types of Fiscal Policies Based on Budget Outcome

• Expansive Policy (Increasing Government Spending (G) or Decreasing Taxes): Leads to a deficit.
• Restrictive Policy (Decreasing G or Increasing Taxes): Leads to a surplus.

The Budget as an Instrument of Economic Policy

• It provides financial planning (short, medium, and long term).
• It commonly refers to a period of one year.
• It details costs exhaustively.
• It includes an estimate of income.
• The Public Administration must adhere to it.
• Through Government Spending (G), the state can influence Aggregate Demand (DA), expanding or contracting it, thereby changing the level of economic activity.