Question

Submit (no less than 500 words)

You are an “Economic Consult” attached to the Prime Minister’s office. The economy has slowed down, unemployment is high, and interest rates are rising. Should the government provide jobs? Please submit a report advising the government what course of action they should take.

Answer 1

When an economy slows down, the net effect of the same is that the demand for goods and services begins to decline. As this happen, producers start to make significant losses and then, they in turn fire people from work to control their costs of operations.

The resultant of this is that a full blown recession cycle comes into existence, wherein lack of demand leads to lack of supply and income generation both for suppliers as well as for consumers respectively.

The course of action recommended in the situation is for government to follow an expansionary fiscal policy. This is one in which the government reduces the taxes on people as well as increases its expenditure, to allow for the economy to come back to its normal state.

As far as possible, direct market intervention, in which the governments directly themselves provide jobs to people should be avoided and the market can be corrected through the following steps which themselves would lead to better paying jobs, without the government being an active part of the economic society.

The two steps involving market correction are the government reducing taxes as well as increasing spending. Now, consider a tax break wherein people can defer their tax payments for a couple of months or permanently for a year as the government wants to increase the flow of money in the economy. As this happens, producers and consumers have higher availability of funds with them. The resultant of which would be an increase in the aggregate spending of people as they have higher net income. As spending increases, and corporate houses retain money which they otherwise would have given away as tax, they can then hire more people into the system and the economy returns back to its normal state.

The other thing which will impact the society is an increase in government spending in areas such as infrastructure or other key resource areas. Contracts granted to companies against the same, would increase the flow of money with them, and the overall state would be such that more jobs can themselves be created.

The net effect on the aggregate demand and supply is as explained as follows:-

Here, we see that the initial equilibrium shifts rightwards as the demand curve which is downward sloping, indicating an increase in demand with a decrease in price also shifts towards the right. The prices at new equilibrium increase and so does the quantity demanded and supplied.

Thus, the government can intervene with a strategy to decrease tax rates and increase net spending and this will itself create jobs in the market place. Direct intervention of governments in the markets and being involved in business due to cyclical unemployment and recession is not recommended.

Please feel free to ask your doubts in the comments section if any.