Question

Macropoland, a country that is a natural gas and oil importer, has a natural rate of unemployment (at the full employment level of GDP) that is about 4.5%, and the long run average rate of inflation over time has been about 2%. However, during the period 1973-1974, the country experienced an inflation rate of about 15% while simultaneously experiencing unemployment of nearly 13%.

At the present time, Macropoland is experiencing very sluggish consumption and investment (a result of a fall in the housing market), and unemployment has again edged up to around 9%. Inflation is very low at 0.4%.

Macropoland has just hired you as their economic advisor. You have a big job ahead of you. Using your knowledge of aggregate demand and aggregate supply, can you explain what happened in these two time periods?

Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical manner as appropriate for the genre of writing. Use well-structured sentences, audience-appropriate language, and correct conventions of standard American English.

Answer 1

When a country faces high inflation and high unemployment rate, then the country is said to be facing stagflation. Here, Macropoland experienced an inflation rate of about 15% and also experiencing unemployment of 13%. High inflation was mainly because of steep hike in crude oil prices. If the country chose to reduce the consumption of oil and gas, it would lead to negative ripple effects in the different sectors of the economy. Real purchasing power was siphoned off by the oil producers.

Macropoland is experiencing very sluggish consumption and investment, and unemployment has again edged up to around 9%. Inflation is very low at 0.4%. Hence, we can say that the country is facing fall in aggregate demand as low inflation doesn't incentivize producers to increase production, which will lead higher employment due to increased business activity, and the economy would heat up. So, the government should use expansionary fiscal and monetary policy to increase aggregate demand and consequently higher employment level.