Question

The author, in her/his conclusion, highlighted the challenges facing the economy in a statement: “What we are not hearing is significant expansion plans. The government balance sheet prevents it from stimulating the economy – it has to come from the private sector.” As an economist, you have been tasked to explain to a business forum how investment can be used to expand the economy. In your presentation, critically review four factors directly linked to investment and how this causes a shift in aggregate demand (AD) curve. [20 Marks] (1 mark for each identified factor 4 marks for explaining each factor).

Answer 1

A) Since economy is in recession and govt is facing fiscal deficit so govt can not take the fiscal measure by pumping more demand by increasing expenditure. Now govt may adopt following steps to spur the growth of economy:

Using quantitative easing: govt can issue the money electronically and buying the securities from the market. In this way more money shall be infused in the system and automatically demand shall spur to incentivise the economic activities.

Targeting high inflation: concentrating on growth and taking the inflation issue for granted for some times.

Devaluation of home currency also would help to deal with this problem since export shall rise.

b) Developed countries suffer from the malady of all in the demand. There saving is not an issue for growth and development. Fall in demand is major cause of recession. Hence fall in saving will increase demand and more gooods and services production will surface in an economy. It will help to deal with the recession.