Question

We are advisors to the president. The nation is experiencing the following: a. It has a high unemployment which stems from an insufficient use of resources. b. It faces a current account deficit. c. It has a capital account surplus. d. The technology level is low e. The infrastructure level is low. What policy recommendations would we offer to cure the aforementioned maladies? Note, these policy recommendations should be complementary to one another, or if there is some contradiction, we should advise a sufficient number to address all of them.

Answer 1

Answer:

Lets address these problems one by one. In case of high unemployment, the aim should be to adopt loose monetary and fiscal policy to try and stimulate the economy. Loose monetary policy will mean that interest rates are lower and so people will borrow more and employ more. Also a loose fiscal policy through lower taxes will increase disposable income of people and encourage them to spend more. Higher disposable incomes will mean lower unemployment. These measures will thus lower unemployment. As regards a current account deficit, the aim should be to depreciate the exchange rate so that there is an increase in exports and a fall in imports. This can be brought about through a lower interest rates as described earlier.The lower interest rates will also mean that borrowing will become easier and so this will improve the technology level in the economy through increased investments. So a loose monetary and fiscal policy will raise the technology level also over time. The infrastrcuture will also improve the same way through increased borrowing and spending which will happen if firms have higher after tax profits and also lower interest rates encouraging them to borrow more. The capital account deficit will ideally be improved through increased capital inflows, this can happen through offering increased tax incentives to foreign firms to encourage them to invest more. This will all be a part of a looser fiscal policy.

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