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In: Economics

Automatic forces will move real GDP back towards potential GDP in the long run. Do you...

Automatic forces will move real GDP back towards potential GDP in the long run. Do you think this means that the government should not intervene in this process?

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Expert Solution

The intervention by the government depends on how far below the potential level of GDP is the actual GDP. Now in nromal times, if the Australian GDP is performing well and there are just cylical fluctuations due to which the GDP gap is increasing, the government intervention should be minimized and the free markets should be allowed to operate as there is nothing structurally wrong with the economy. But is changes during times of a recession. If the economy is significantly hurt due to an external shock, like the COVID-19, then government action is a must in hastening the return to potential GDP. Both the aggregate demand and aggregate supply can be adversely affected in such time, and if left to market alone, it may take a long time to return to normal. Expansionary fiscal and monetary policy are thus required from time to time to hasten the growth of economy and minimize the hardships for the people from a crisis.

Rahul Sunny answered 1 year ago
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