Question

What is the problem(Recscission or inflation )and solution for country A with GDP1.5%, inflation 1.4%, unemployment rate 11.4%.

If the problem is Recission. Use all macroeconomic graphes to show the effects of applying expansionary policy in terms of (monetary policy, fiscal policy, foreign trade, labor force or investment)

Answer 1

The country is facing with severe deflationary situarions in the country, because of that GDP is very low, unemployment rate is sky rocketing. The country is having a recession.

The solution for this condition is the expansionary monetary or fiscal policy.

When the expansionary monetary policy is used tthe monetary base in the country will increase and that is showed by the rightward shift in the LM curve in the above diagram. The expansionary monetary policy brings down the interest rate which attracts new investments and ultimately results in the rise in output.

When money supply increases in the money that means more money in the hands of the people soo there is more demand for goods and services in the economy. This results in the rightward shift in the aggrgeate demand curve as shown in the above diagram (panel b). This will create more output and brings up the price level in the economy.

Expansionary fiscal policy.

As shown in the panel A, the expansionary fiscal policy shifts the AD curve to the right which raises the price level and output in the economy.

In the the IS-LM model, an expansionary fiscal policy shifts the IS curve to the right which raises the interest rate and increases the output in the economy. This is shown in panel B.

The expansionary monetary policy is a movement along the investment demand curve while the expansionary fiscal policy is able to shift the investment demand curve to the right. The government can cut such as business taxes in the economy which would greatly affect the investment in the economy.