Question

Explain what will happen in a nation that tries to solve a structural unemployment problem using expansionary monetary and fiscal policy. Draw one AD/ AS diagram, based on the Keynesian model, for what the nation hopes will happen. Then draw a second AD/ AS diagram, based on the neoclassical model, for what is more likely to happen.

Short answer

Unemployment rate would not decline.

Step-by-step solution

Step 1. Introduction 

Unemployment refers to the situation when a person who is willing and able to work is not able to find a job. The unemployment caused because of a mismatch between the skills possessed by workers and the skills demanded by businesses is known as structural unemployment.

Step 2. Explanantion

Structural unemployment is not caused because of a lack of demand. It results from a mismatch in the skills demanded in the labor market and the skills possessed by workers. An expansionary policy cannot bridge this skill gap.

To address structural unemployment, the focus should be on supply-side policies such as providing education, training, skill development, etc.

Step 3. Keynesian Diagram

Step 4. Neoclassical Diagram