Question

Country A is currently experiencing a balanced budget in a normal cycle. The government in country A is in charge of undertaking different policies to prevent a predictable recession in future.

(a) Suppose the government offers a stimulus package to prevent the recession. Describe how this stimulus package could prevent the recession and would it necessarily work well?

(b) Now suppose there is a Country B that trades with Country A. In particular, Country A imports some products from Country B. What would be the effects on trade between the two countries as a result of the policy in part (a)?

(c) How would the unemployment in Country A change due to the policy in part (a)?

(note: I hope you can give me detail information for each separate questions, Thanks.)

Answer 1

A. Fiscal stimulus is most effective if:

1) it is implemented as early as possible in a recession

2) it is directed to individuals and entities who will spend any additional resources they receive quickly

3) it errs on the side of being larger than ultimately necessary rather than smaller

4) its size and duration respond to changing circumstances.

• most important policies for effective fiscal stimulus:

  • Providing additional weeks of unemployment insurance and raising the weekly benefit level

  • Raising the maximum SNAP benefit level and ensuring that unemployed adults have access to food assistance

  • Providing state fiscal relief by reducing the percentage of Medicaid spending for which states are responsible (by increasing the federal matching rate) and giving states, tribes, and localities temporary block grants or other flexible funding to maintain needed services such as education

  • Providing cash assistance to people facing economic insecurity through monthly or one-time cash payments that can help address both emergencies and ongoing basic needs, as well as through expansions of refundable tax credits

  • Implementing a subsidized jobs program for low-income workers, although the special circumstances of COVID-19 require waiting until after the health crisis diminishes and such programs can be undertaken safely

  • Increasing housing assistance to prevent a sharp rise in evictions and homelessness.

• Recessions have profound human and economic costs. Prolonged unemployment harms not only workers’ job prospects and lifetime earnings but also the health and well-being of them and their families. Workers without a college degree and workers of color are the most vulnerable to these adverse effects. Moreover, long unemployment spells and diminished demand for goods and services in a recession erode job skills among unemployed workers and reduce business investment, which can depress the economy’s productive capacity long past the end of the recession.

• Interest rates are considerably lower now than they were in the two decades leading up to the Great Recession.

• Fiscal policy has a greater role to play in fighting recessions and stimulating recoveries than academic economists’ policy advice reflected prior to the Great Recession, especially in light of the limits to conventional monetary policy. Strengthening the fiscal policy response to a weakening economy requires more robust “automatic stabilizers” — the features of tax laws and spending programs like unemployment insurance and the Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp Program) that automatically reduce income losses and support consumer spending in a downturn

• Concerns that the United States does not have the “fiscal space” — due to high levels of deficits and debt — to enact robust fiscal stimulus to minimize the human and economic costs of a recession are misguided. The United States has a long-term fiscal challenge, not an immediate debt crisis. Deficit and debt concerns should go on the back burner in a recession.

B.

• Export growth had been increasing at a roughly similar rate in most of the world’s major geographical regions in the two years prior to the crisis

• During the crisis, however, the GDP declines in the CIS were some of the largest in the world, and the global price of their main export, oil (and to a lesser degree gas) collapsed

• economic sectors that are intensive in trade (i.e., a high percentage of production is exported or consumption is imported) are also sectors that are intensive in the use of credit (i.e., things like vehicles, consumer durables, and investment goods)

• financial crisis that impairs the banking system is likely to have a significant impact on sales of these tradeable items as customers cannot find financing. This is another reason why trade flows are likely to decline by more than GDP during a crisis.

• The global crisis resulted in significant changes in countries’ terms of trade (i.e., the price of their exports relative to imports).

• Oil exporters suffered the largest declines in their terms of trade as the price of energy experienced some of the largest price declines of any commodity; as a result the energy-rich CIS were particularly hard hit

• A decline in the terms of trade implies an additional decline in the economic welfare of a country since calculations of real GDP ignore price changes.

c.

• two main strategies for reducing unemployment –

  • Demand side policies to reduce demand-deficient unemployment (unemployment caused by recession)

  • Supply side policies to reduce structural unemployment.

• Monetary policy – cutting interest rates to boost aggregate demand (AD)

• Fiscal policy – cutting taxes to boost AD.

• Education and training to help reduce structural unemployment.

• Geographical subsidies to encourage firms to invest in depressed areas.

• Lower minimum wage to reduce real wage unemployment.

• More flexible labour markets, to make it easier to hire and fire workers.

• Policies to reduce supply side unemployment

  1. Education and training

  2. Reduce the power of trades unions.

  3. Employment subsidies.

  4. Improve labour market flexibility

  5. Stricter benefit requirements.

  6. Improved geographical mobility.

  7. Maximum working week.