Question

In light of your thoughts on your life ten years from now, please reflect upon how economics and the business cycle will influence and determine the outcome of your journey from now until then. in 100 words

If the government today decides that aggregate demand is deffiicient and is causing a recession, what is it likely to do? What if the government decides that aggregate demand is excessive and is causing inflation?

Answer 1

a) Based on economic developments in the India over the last decade, we can assume that there will be steady growth in service sectors especially transportation, health, tours and travel. Apart from that, banking and insurance sectors will see major transformation with relaxation in Foreign direct investment(FDI) norms by the present federal government. However, labor force or employment rate will not increase appreciably due to use of capital intensive technologies in different sectors. It will also affect to many of us on several fronts such as employment, housing, primary education for kids, healthcare and personal savings. Those having outdated qualifications and skills will certainly face difficulties in career field.

b) The first important step that a government will initiate to revive slow demand and supress recessionary tendency in economy is revision of key interest rates especially reducing lending rates so that different sectors can get cheaper loans and grow that will reduce cost of production and inflation rate.

Another step is increasing allocations for infrastructures such as Power, Railways, bridges, ports and highways. Advanced infrastructure and communication facilities attract domestic and foreign investors in a country that will create new job opportunities for people, which will raise purchasing power of people and also demand for goods and services.

The third step is reduction in both personal and corporate taxes that will allow more money in the hand of people and will ultimately raise the demand in the economy.

Last step that a government will take is providing sops to foreign companies for investment in the country. In an underdeveloped or developing country, government don't have sufficient capital to invest in key sectors and therefore, foreign direct investment plays significant role in finacing different projects in that country.

If aggregate demand is very high that raises inflation rate, then it may be due to less aggregate supply due to several factors such as hoardings, high purchasing power of people, low production level etc. in an economy. In such case, government will take corrective steps such as boost up sectors where production level is constant or deficient, taking punitive actions against black marketers and hoarders, improving transport facilites for easy movement of consumable items in the market etc.