Cambridge International as and a level Economics Ebook

multiplier
(see below) and the response from consumers 
and fi rms. Th
e larger the size of the multiplier and the 
more confi dent consumers and fi rms are, the greater the 
fi nal rise in aggregate demand is likely to be.
Multiplier: 
a numerical estimate of a change in spending in 
relation to the final change in spending.
KEY TERM
It is also important, but not easy, to get the size of the 
changes right. For example, if a government underestimates 
the size of the multiplier, it may, for instance, cut income 
tax rates by too much.
 Figure 9.13
 shows aggregate demand 
increasing and eliminating a negative output gap but at the 
cost of increasing the price level.
To reduce frictional and structural unemployment, 
a government is likely to introduce supply side policy 
measures. It may reduce unemployment benefi t and 
income tax rates to increase the reward from working 
and so encourage people to spend less time between 
jobs. Improved education and training may increase 
workers’ occupational mobility and so reduce structural 
unemployment. Trade union reform may stop trade 
unions pushing up the wage rates of their members above 
the equilibrium levels and taking industrial action. Th
is 
may increase the effi
ciency of the country’s labour and 
product markets.
TOP TIP
In evaluating what might be the appropriate policy 
measures to reduce unemployment it is important to 
consider the cause/s of unemployment and the possible 
adverse side eff ects of such measures.
Reflationary fiscal or monetary policy measures: 
policy 
measures designed to increase aggregate demand.
KEY TERM
0
Price level
Real GDP
Y
P
P
1
LRAS
AD
1
AD
1
AD
AD
Y
1