Question

ASSIGNMENT 2

1. Use the business cycle model to explain the difference between a recession and an economic boom. Explain in detail how businesses are affected by a recession and an economic boom.                                                                                               [25 marks]

2. When the economy is in recession, the output will be falling, unemployment will be rising, and business confidence will be fading. What policies must the government take to reduce the adverse effects of the recession? Use examples of policies that were used by Namibia and other countries on the globe during the 2006-2009 global recession to support your answer.                                                                                                              [25 MARKS]

Answer 1

a. When the economic growth rate of the economy falls below the steady state growth rate in the economy, then economy is in recession according to business cycle model. Ans when the economic growth rate in the economy is above the steasy state growth rate level in the economy is on boom according to business cycle theory. During the time of recession, output falls, prices decrease and unemployment increases in the economy because of fall in labor demand. On the other hand, during the time of boom, output and prices increases and unemployment decreases in the economy because of increase in labor demand in the economy.

During recession, businesses see a decrease in the demand of their product and this decrease in the demand of the product induces firms to produce less and their production decreases and firms are generally in losses during the time of recession. During boom, businesses see an increase in the demand of their product and this increase in the demand of the product induces firms to produce more and their production increases and firms are generally making profits during the time of boom as overall aggregate demand increases in the economy.

b. In order to reverse the effects of the recession, the government should use expansionary fiscal policy which involves increase in the level of government expenditure and reduction in tax rate in the economy which will increase the level of aggregate demand by increasing consumption expenditure and consumption expenditure in the economy and thus aggregate demand increases eliminating recessionary gap in the economy.

All economies like Namibia introduced a fiscal stimulus package involving increase in government expenditure and reduction in tax rate to increase aggregate demand to eliminate recessionary gap in the economy.