With the help of a diagram, explain the cause of demand-deficient unemployment.

      One of the main macroeconomic goals of an economy is to keep unemployment levels low. Unemployment is the state when people who are actively seeking a job are unable to find one. A government hopes to achieve employment equilibrium, meaning that the aggregate supply of labor provided by the workers is equal to the aggregate demand for labor provided by the firms. Demand-deficient unemployment, or cyclical unemployment, occurs as a result in a decline of overall economic activity of an economy leading to a decrease in the demand for labor. This is most commonly associated with the cyclical downturns of an economy such as recessions or slumps, where a decrease in economic growth leads to a decrease in aggregate demand by consumers. This could potentially result from an appreciating exchange rate making exports less attractive to foreign consumers, high inflation damaging domestic consumer purchasing parity, or general consumer concern over future economic health. Since consumers are spending less on goods and services, producers now have less incentive to produce. This causes the producers to reduce their output by decreasing their demand of labor, thus aggregate demand for labor decreases in response to the aggregate demand from consumers, creating an excess supply of labor and resulting in a disequilibrium of the labor market.

This scenario is a result of a decrease in the aggregate demand for labor in a market, illustrating demand-deficient unemployment. (Diagram would be drawn to illustrate the following: As the economic activity has slowed down, the real output has decreased. This has resulted in the firms reducing their demand for labor, producing a shift inwards of the aggregate demand curve from ADL to ADL1. This decrease in the aggregate demand for labor has resulted in a decrease in the average wage level from We to W1 and the number of workers has also decreased form Qe to Q1.As the market has shifted out of equilibrium, the decrease in demand for labor has resulted in a situation of excess supply of labour)