Question

the corona virus pandemic is set to bring down the country's GDP growth from an all time high 8.15% recorded in Bangladesh in the last fiscal year to straight 1.6% this fiscal year according to world bank.The government though is holding out for an 8.2% growth next fiscal year.How do you incorporate your idea to manage this sky high target of GDP and modern monetary policy (of Quantity theory of money and Phillips curve)?

Answer 1

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Question:

Answer:

Quantity Theory of Money:

Quantity theory of money explain the relationship between money supply and price level. Quantity theory of money assume that the relationship between price level and money supply is positive and move in the similar direction. It means when money supply increase then price level/inflation also increase and vice-versa.

I can understand it br Fisher's Equation:

MV = PT

Where,

M = money supply

V = velocity of money

P = price level

T = Volume of transaction of money

Phillips Curve:
It is a macroeconomic Concept it tell about the relation between inflation and unemployment level. According to this concept inflation unemployment level have opposite relation. Its mean when, economy grow then inflation level also increase and its creat more and more jobs that reduce the unemployment level and vice-versa.

Now we come on the question:

We know that the world is facing of Covid-19 crisis. It is global pandemic and global economy is facing the economic downturn and economic crisis. GDP, employment level, consumer confidence, income level, fiscal deficit, consumption level, investment level have affected badly. GDP, employment level, consumer confidence,consumption level, investment level, income level is falling down drastically and fiscal deficit, unemployment level is at pick level. People are losing their jobs and they are very uncertain about the future also.

Bangladesh is also a part of this global village and facing the same situation and same problems because of this COVID-19 crisis. The corona virus pandemic is set to bring down the country's GDP growth from an all time high 8.15% recorded in Bangladesh in the last fiscal year to straight 1.6% this fiscal year according to world bank.The government though is holding out for an 8.2% growth next fiscal year.

So, there is a need of the combined efforts of the government and the central bank of Bangladesh. But as per the question we will talk about the modern monetary theory and how will it useful to achieving the target of high GDP growth rate (8.5%). Here we will discuss about the quantity theory of money and Phillips curve. We have seen above all about the both of the macroeconomic theories and the current situation of the economy globally and Bangladesh also. So, here the central bank of Bangladesh will follow the expansionary monetary policy. Here, the central will increase the money supply through the use of monetary policy tools like, decreasing discount rate, purchasing government securities, decreasing reserve requirement etc. It will increase the money supply in the economy and loan will become more cheaper. Cheaper loan will increased the consumption level ( its contribute the 61% in AD) and investment level and boost the consumer confidence. A higher level of Aggregate Demand (AD) in the economy will increased the price level. This result (increasing the money supply in the economy and loan will become more cheaper. Cheaper loan will increased the consumption level ( its contribute the 61% in AD) and investment level and boost the consumer confidence. A higher level of Aggregate Demand (AD) in the economy will increased the price level) will converted into the higher growth rate (Higher the GDP growth rate) and higher the growth rate and higher inflation late will creat new jobs and reduce the unemployment level.

Thank You