ExpertEasy1 markMultiple Choice
AQA GCSE · Question 04 · How the economy works
Which of the following best describes the type of unemployment caused by interest rates and tax rates remaining high for a long period of time?
Which of the following best describes the type of unemployment caused by interest rates and tax rates remaining high for a long period of time?
Answer options:
A.
Cyclical
B.
Frictional
C.
Seasonal
D.
Structural
How to approach this question
Consider the effect of high interest rates and high taxes on the economy. They reduce spending and investment, which lowers aggregate demand. Then, identify which type of unemployment is caused by a lack of aggregate demand.
Full Answer
A.Cyclical✓ Correct
The correct answer is A. High interest rates and high taxes reduce aggregate demand, leading to a downturn in the economic cycle and causing cyclical unemployment.
High interest rates make borrowing more expensive, and high taxes reduce disposable income. Both factors lead to a decrease in aggregate demand. Unemployment that rises during economic downturns (recessions) and falls when the economy improves is known as cyclical unemployment. It is directly tied to the business cycle.
Common mistakes
Confusing cyclical unemployment with structural unemployment. Structural is about a skills mismatch, while cyclical is about a general lack of demand in the whole economy.
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