Question

Over the past two years, the unemployment rate in Country X has risen from 5 per cent to 9 percent. As the leader of country X, you have been presented with two policy options to address the unemployment problems. Policy 1: Use tariffs and quotas to restrict imports and thus protect jobs in Country X. Policy 2: Use monetary and fiscal policies to solve the unemployment problem without resorting to trade restrictions. a) Explain two disadvantages of selecting Policy 1 b) Describe in detail one specific monetary policy action and one specific fiscal policy action you would take to reduce unemployment. Explain how each of these actions would affect each of the following in the short run. I) Aggregate demand II) Output and the price level III) Real Interest rates c) If the interest rate effects you identified in Part (b) continue in the long run, explain the impact of these effects on economic growth.

Answer 1

The two disadvantages of increased tariffs is lower consumer surplus and increase in deadweight loss. Also other countries may retaliate and thus both exports and jobs will decline.

I will choose open market operations as part of monetary policy. Purchasing securities will pump money into the economy and stimulate security and stock market. But the main advantage is as supply of money increases interbank rate decreases. As cost of funds to banks decreases they will decrease their lending rates. Investors who face lower costs of finance will borrow funds and invest it in new factories etc. Thus it leds to employment

Fiscal policy will be to increase govt expenditure. As govt expenditure on roads etc increase employment will be created. Due to multiplier effect income and employment will increase multiple times.

Aggregate demand will shift rightwards due to both policies. Output and price level will rise. Real interest rate will fall due to monetary policy and will rise due to fiscal policy. If it continues in longrun fiscal policy will not increase employment but monetary policy will