Question

Assume the table below represents key economic data, including GDP, unemployment and inflation over the last 12 months. What is happening and what type of policy should be applied to bring the economy back to full-employment? Period Annualized GDP Growth Unemployment Rate Annualized Inflation Rate 2020 Q1 2.7% 4.5% 2.7% 2020 Q2 2.2% 4.8% 2.5% 2020 Q3 1.6% 5.3% 2.3% 2020 Q4 1.1% 5.8% 1.8% 2020 Q5 0.6% 6.3% 1.4%

A. Recessionary gap and expansionary policy needs to be applied B. Inflationary and contractionary policy needs to be applied C. Inflationary gap and expansionary policy needs to be applied D. Stagflation and expansionary policy needs to be applied

Answer 1

Ans: As we can see from table that annualized GDP growth is declining over the last periods and not onlythat Unemployment rate has surged in, less production activity is taking place and more people are becoming unemployed which means that there is recessionary gap where the actual output is less than the potential output and rate of unemployment is rising over a period of time. There is a recessionary gap in the economy because of the deceasing Annual GDP growth and rising Unemployment rate.

Government should pursue expansionary fiscal policy to bring back the economy to the equilibrium level which means that the full employment level because by pursuing expansionary policy, government will increase investment and the production will rise and the investment levels should be boosted to encourage the production spending and to enhance the productivity levels thus gvt should increase the investment tobring the economy back to full employment level. Thus correct option is (a)