Question

Write about 300 words:

While over the long run, the economy grows about 2 to 3% per year on average, over the shorter term, the economy goes through business cycles. Think about the growth rate of GDP, the inflation rate, and the unemployment rate over the last 12 months. What conclusions about the state of the economy? Would you describe the economy as booming, recovering, or in recession during the last few years? Why? Use the AD-AS model to describe the economy. Which curve do you think caused the change? Explain your reasoning.

Answer 1

Over the past few years, economy was witnessing the growth rate of about the 2 % to the 3 %. here, the economy was recovering from the great recession that hit the economy in the years of 2008-09.

The during this phase, the real GDP and price levels, both increased marginally, the process of recovery was rather slow and tardy.

Presently, economy was booming and it had almost fully recovered from the recessionary pressure.

Following is the diagram:

In the above diagram, the economy was below the full employment level at the point E which denotes the underemployments. Thus ,expansionary monetary and fiscal policies caused the rightward shift in the aggregate demand in the economy. And aggregate demand became the AD1. It increased the both real GDP to the level of Q2 and price level increased to the P2 as well.

But recently, in the past two months, the COVID-19 has led to the fall in the aggregate demand and economy is again operating below the full emloyment level. Here again the more stimulus actions are needed to drive up the aggregate demand and real output in the economy.

Now boom phase is going to be over and economy would enter the long recessionary phase. The investment expenditure is too low. further consumer sentiments are also negatives.