Question

What are the different policy tools for dealing with cyclical unemployment?

Short answer

Increasing government spending, reducing taxes, purchasing from open market, reducing interest rate, etc.

Step-by-step solution

Step 1. Introduction 

Unemployment refers to the situation when a person is willing and able to work and is actively looking for a job but is not able to find one. Cyclical unemployment refers to the unemployment caused by a decline in output resulting from business cycles.

Step 2. Explanation

During the recession, cyclical unemployment increases and it falls during the period of expansion. This increase in unemployment can be handled through expansionary monetary policy and expansionary fiscal policy.

Expansionary fiscal policy tools are an increase in government spending and a decrease in taxation. Expansionary monetary policy tools aim to increase the money supply through a reduction in interest rates, open market operations, reduction in reserve rate, etc. Both types of tools aim to stimulate aggregate demand thus increasing output and employment.