Question

Policy-makers should not be given discretion to respond to recessionary shocks.” Summarize the arguments in favor and against this proposition.

Answer 1

I am against the statement.

In a situation of a recession, the demand is low and prices fall. At a lower price the output falls and the economy witness unemployment. With increased unemployment, the wages fall and at a lower wage, the supply increase and the prices fall. Ultimately, the market will settle at the new equilibrium which is lower than the previous price and equal to the long run equilibrium output but this automatic adjustment of prices and output takes a lot of time in the economy.

Government intervention is important in the situation because this automatic adjustment or the business cycle takes a lot of time to settle or reach the new equilibrium. All this while the consumer will be suffering from unemployment. Government intervention will expedite this process and increase the output of the economy. Raising the living standard of the people or preventing it from falling lower.