Question

Expound on this quote. “The economy may easily slow down in the next couple years, if not enter into a recession. The reason is that there are a few optimistic factors, but there also are a few pessimistic ones. Among the positive variables are expansionary monetary policy, strengthening of banks, such as the increased capital requirements, improvement of the firms’ balance sheets, i.e., increase of cash holdings and general improvement of the mood of society. However, there are three key weaknesses. One is the high levels and ratios of debt for businesses, households and governments. The second is the woeful investment in infrastructure of all sorts, which has occurred in the last three decades. The third is the increase in the last three decades in inequality of income and wealth, which makes the masses, poor and lower middle income people, to lose substantial buying power.”

Ascertain that you discuss the effects on GDP, inflation, competitiveness, interest rates, employment, and general welfare of society and most importantly on the stock market.

Answer 1

The above quote shows that there will be mixed impact on the economy of the above variables. Overall, the Gross Domestic Product of the economy will increase. This is because of expansionary monetary policy of the government and a general optimism in the society. This will shift the aggregate demand of the economy rightwards and thus lead to increase in national output or Gross Domestic product of a nation.

Increase in the aggregate demand of the economy might initially lead to increase in the inflation rate of the economy.

Overall competitiveness of the economy might decline because of high level of debt especially of the government and decline in capital expenditure mainly on infrastructure. This will hamper the competitive level of the economy.

Expansionary monetary policy of the government will shift the money supply curve rightwards and thus lead to fall in the level of interest rate in the economy.

The increase in the level of overall GDP will increase the employment level of the society as increase in aggregate demand will increase production level of the society and thus increase demand for labor and thus unemployment rate will decline.

Overall welfare might decline because of increase in inequality. Thus, rich will be able to take the fruits more as compared to poor and thus inequality will increase further.

Stock markets will flourish as there is general positive mood in the society and optimism in the society and thus overall investment in the stock market will increase.