Question

Use the related theories of monetary policy and fiscal policy in macroeconomics to analyze Hungary’s disinflation, fiscal sustainability, and economic growth in recent years.

Answer 1

The recent data released by the statistical division depicts that economic growth rate in Hungary has been negative in recent years. Both the GDP growth rate and GDP per capita has decreased in the economy. This is mainly because of the fall in the aggregate demand caused by the current pandemic. The fall in the level of aggregate demand in the economy has caused recessionary gap in the economy. This can be depicted in the diagram as follows:

The economy is intially at point E1 during the time of pandemic because of reduced aggregate demand in the economy and recessionary gap caused in the economy. The actual output in the economy is below the fulll employment level of output in the economy. The government and the Central bank has been following expansionary fiscal and monetary policies aimed at increasing the level of aggregate demand in the economy to AD' and move the economy to its full employment level where prices has increased. This is causing increase in government expenditure and reduction in taxes and thus is considered to be fiscally unsustainable at the time but due to fall in the economic growth rate in the economy there is need to follow expansionary fiscal and expansionary monetary policy by the government and Central bank.