Following a decade of extensive state-led investment in transport networks and public utilities, the Republic of Valenica faced mounting fiscal pressure. By 2021, its public debt-to-GDP ratio had climbed to 118%, prompting the government to implement a strict fiscal consolidation program. This involved halting several major capital projects and reducing departmental budgets.
While aimed at stabilizing public finances, the policy has drawn criticism from industry groups. Extract B states: "The scaling back of public infrastructure spending has had a severe knock-on effect on private sector manufacturing and construction jobs."
With the help of an AD/AS diagram, explain how a reduction in government spending could lead to an increase in unemployment in the private sector.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.