Question

Country A is currently experiencing a balanced budget in a normal cycle. The government in country A is in charge of undertaking different policies to prevent a predictable recession in future.

(a) Suppose the government offers a stimulus package to prevent the recession. Describe how this stimulus package could prevent the recession and would it necessarily work well?

(b) Now suppose there is a Country B that trades with Country A. In particular, Country A imports some products from Country B. What would be the effects on trade between the two countries as a result of the policy in part (a)?

(c) How would the unemployment in Country A change due to the policy in part (a)?

Answer 1

Country A is experiencing a balanced budget in a normal cycle. If country A predicts a recession in future. Then then nation would be below full employment equilibrium where Aggregate demand curve and aggregate supply curve intersects at point A which determine price level P and output level Y. Then the government A is undertaking different different policies to prevent a predictable recession in future a. Government offers a stimulus package to prevent recession. It will increase the government spending by investing in infrastructure projects and transfer payments like pensions, scholarships etc. This will prevent the recession by increasing income levels of individuals . Higher government spending increases, private investment, employment production and output in the economy. Thereby income level in the rises. As a result consumption will increase. It boost the aggregate demand for good and services and thereby it shifts AD curve rightward as AD1 . It drives up the price level to P* and increase output level to Y* b. Country B is trading with Country A . In particular, Country A imports some products from Country B .As a result of government policy ,both imports and exports of country A will increase. As result of higher government spending , consumer income will increase ,at the same time, aggregate production will also rise. Production increases exports of the country A. c. Unemployment in country will fall due to higher government spending. Higher government spending promote higher level of production due to higher demand for good and services. Higher production leads to higher labor demand. Firm increase the labor wages to attract labors. Thereby labor supply will increase and it reduce unemployment rate in country A