se increased unemployment. Classical economists also argue that government policies, such as minimum wage laws, can create unemployment because people may have worked the same job for less than the minimum wage. Therefore, the government should do nothing to try to change unemployment. The classical economists feel very similar about inflation. That is, just as competitions in the labor market will always generate full employment, competitions in the market for capital generate the full employment of the capital. As the Fed changes the money supply, the inflation rate changes.
             The Keynesian economists believe the possibility that an economy can be in equilibrium at less that full employment. They argue that with government intervention, equilibrium at full employment without inflation can be achieved by managing aggregate demand. Using Domtar in an example, if the government spending increased, the aggregate demand would increase, and Domtar's production would increase. Therefore, they could hire more workers and unemployment would decrease. If inflation should occur, they say the government should reduce spending to reduce demand.
             The coexistence of inflation and unemployment referred to as stagflation, led to the creation of the neo-Keynesian school. This school uses the Phillips curve to show the inverse relationship between unemployment and inflation. They argue that government intervention works in the short run, but not in the long run. As stated before, Domtar workers are in a labor union. If government policy is to reduce unemployment, the union feels secure about their jobs and change their focus to wage increases. If they get the wages increased, they company may increase prices to maintain profit (inflation). With price increases, demand will decrease and the company may be forced to cut back on production and employment.
             Rational expectations economists believe that government intervention in emp...