Question

One of the economic impacts of the current covid -19 pandemic is a rise in demand deficient unemployment.
i) Explain how fiscal policy can be used to solve this problem.
ii) How can monetary policy be used to address the same problem.
iii) Explain the links between changes in the nation’s money supply, the interest rate, investment spending, aggregate demand and real GDP. Illustrate with a graph where appropriate
iv) Discuss the negative redistributive effects of unanticipated inflation on any three groups/agents in the economy.
v) Which of the two types of inflation is most likely to be associated with a negative GDP gap? Illustrate with a graph.

Answer 1

1) expansionary fiscal policy to create demand In the economy, which will lead to boost production and employment and thus economy may come out From recession.

2) expansionary monetary policy or decrease repo rate to increase money supply in the economy and thus boost demand and investment production ,employment in the economy.

3) if interest rate are lowvin the economy than borrower will borrow money more and money supply increase , which will increase demand in the economy and also investment spending increase as to fullfill increased demand by consumer and as a result real gdp also effected by it as aggregate out put increase in the economy , which create employment and again lead to increase aggregate demand .thus cycle of income and Multiplier of gdp will work.

4) lenders : lenders are in loss as they are not benifit from inflation as they have low purchasing power of returned money of loan as compare to they gave it to lend , because they have not adjust it with inflation.

Property on lease :people who gave property on lease at cheaper rate is also not benifit as it is not adjusted with inflation increase.

Farmers: who sold his produce at cheaper price snd now he is not benefitting from it as he get lower price than unanticipated inflation adjusted benifit.