Second the increased deficit of the government will increase interest rates and crowd out private investment. Here I intend to apply accommodative monetary policy, offceting the effect of the fiscal policy. I will advice the Central bank to increase the money supply through purchasing government bondsopen market operations/. This will decrease the interest rate and encourage private investment, shifting the aggregate expenditures schedule up. We assume that our economy is not in a deep recession, it's investment schedule is elastic enough to respond to the lower interest rate with additional investments. We assume also that money demand is inelastic enough and the increased money supply will have effect on the interest rate. .
All this actions will shift aggregate demand rightward and increase output. The increased output will increase the demand for labor. .
But where I am going to get the money from. I am going to get a loan from a foreign bank, selecting the one with the lowest interest rate and hoping that the returns on the public investment will be greater than the this interest rate. .
But there are other types of unemployment frictional and structural. We can fight with these types of unemployment only in the long run. Economists often use the term "structural unemployment" for employment problems that arise because of a mismatch between the needs of employers and the skills and training of the labor force. .
Let's assume that in my country X there is a high demand for accountants and little supply. At the same time there is a high supply of cleaners and little demand for them. That means there are many jobless cleaners, and these cleaners who have found jobs receive very small salaries, because of the saturation of the market of cleaners. At the same time there is little supply to fulfil the high demand for accountants. The offered celaries for accountants are very high, because they are very scarce on the labor market.
