Question

Assume you are a consultant invited to a country in the South Pacific which is officially recession. It is experiencing high unemployment, high inflation and low economic growth. What advice would you give to the government of this country?

Answer 1

The symptoms of high unemployment, high inflation and lower economic growth say that country is facing stagflation. The stagflation takes place when cost of production increases and AS shifts to the left. To solve it, the following advices will be given:

1.  Implement supply side policies such as reduce taxation upon the firms so that their cost of production will decrease and aggregate supply will increase by shifting to the right. It will increase output and new jobs will be created. So, unemployment will also come down.

2. Bring regulations to control union who are responsible for high wages to the workers. With regulations, firms should be given the opportunity to control wages. It will also control the cost of production, increase in AS and new jobs. Further, control in wages, will also reduce the inflation rate in the economy.

3. Deregulate the industries so that they can operate to reduce the cost. It will make them increase output level and hire more employees at controlled wages. It will increase the economic growth, decrease unemployment and control the inflation as well.