demand management policies

Demand management policies

Monetary policies and fiscal policies are used as demand management policies to correct fluctuations in the economy that is connected with the business cycle. So generally these policies are used to correct cyclical unemployment and it is very unlikely that an expansionary MP has been used for such a sustained period of time. Hence, when we look at such long term low unemployment rate it is more likely that we are looking at a low natural rate of unemployment (Notice the word average unemployment rate? This gives the hint that we are looking at NRU). Hence, when we are looking at a low NRU, the reason why it is low is not so much because of the use of the an easy MP but because of the other policies.

The reason why NRU is low is connected more with the issue of unemployment benefits, minimum wage, the power of the trade union, efficiency wages, training programs. But we must also not forget that since cyclical unemployment can affect the NRU through the hysteresis effect, then to some extent the use of an easy MP which can help to reduce cyclical unemployment can also help keep the NRU low.