Question

As businesses reopen after the shut down response to the Covid virus, the unemployment rate is exceptionally high and the economy is likely producing far below its potential. Identify a policy that may help lift the economy out of this slump. Present an analysis where you explain the impact you expect from your policy on output, prices, wages, employment, and unemployment.

Answer 1

The slump the economies underwent was not like any of the other crises the world has seen as this was not due to any financial irregularities but due to a health hazard that led to all economies completely shutting down hence inducing a supply shock than a demand shock. The economies due to the experience of the recession know how to deal with a fall in aggregate demand but today it's more on the supply side and economies lack experience and don't have sufficient knowledge as to how to get economies out of this supply slump. Today many economies are planning a phased opening up, one such country is India and the policies have been clearly demarcated by the Government that they are going to focus on Make In India, which is increasing in domestic production of goods and services.

This policy will give businesses a chance to expand and hire more as the government has announced economic packages for the businesses especially MSMEs(micro, small, and medium enterprise). The business and firms will be pushed towards increasing the manufacturing of electronics and medical equipment which use to be largely imported. Certain fiscal incentives and subsidies will be provided to the domestic producers. Lastly, the government is planning to increase import duty so that imported goods become more expensive and we increase the consumption of domestic goods.

Going by the circular flow of money -

An increase in the consumption of domestic goods and services induces the firms to produce more(increased output) for which they will employ more hence increasing the employment level and the going wage(fall in unemployment). Increased demand and increased supply will definitely lead to a decrease in the price of goods and services in the long run. the firms will produce more domestically hence reducing their cost of production of imported goods (input). With an increase in output, the economy would be easily able to increase the level of exports hence helping the economy by bringing in increased revenue.