Question

4. a) Amid the unprecedented crisis of Covid-19, Government has announced a number of stimulus packages totaling over Tk.1 lakh crore to stand by the poor and helpless people. How would you evaluate its impact on the economy? Explain with the help of aggregate demand and aggregate supply model.
b) What is inflation? People commonly feel inflation is bad. Do you feel the same? Clarify your stand with necessary arguments.

Answer 1

a) As there is fall in output level due to COVID-19, government announced stimulus package of over 1lakh crore to stand by the poor and helpless people. It will raise cash with poor people who were not able to feed their families such that they can raise consumption and eventually raise aggregate demand in the economy. It will shift aggregate demand curve to its right from AD to AD1 such that it raise price level from P to P1 as well as output level from Y to Y1.

Rise in demand will induce producers to start operations and increase speed of production post COVID and take back to normal. It will shift aggregate supply curve to its right from AS to AS1 which will reduce price to its initial level and raise output level further.

b) Inflation is the rise in overall price of goods in an economy over the period of time. Inflation is not bad everytime, a 2-3% of inflation is always good. It is good, because:

• Rise in price of products helps producers in generating more revenue which helps them in raising salaries of employees. Actually there might be no change in real purchasing power but it gives confidence to all employees when they get a hike in their salary.
• Inflation helps borrowers which make them reduce their burden as they have to pay back money with lower purchasing power.
• It helps economy from slipping into recession which raise unemployment level at its peak and lower the economic activity.