someone please help me. Assume there is a controversy over the nature, health, a
ID: 1198943 • Letter: S
Question
someone please help me.
Assume there is a controversy over the nature, health, and viability of the economy. You are a member of the Council of Economic Advisers to a newly elected president, and you have just reviewed the following data regarding the economy.
*In the past 18 months, GDP growth has slowed from its trend average of 3 to 3.5% to 1%, and the business confidence index is falling.
*Over the past 15 months, unemployment has risen from a little below 5% up to 7.5%, and new reports of large layoffs are appearing in the news.
*Inflation has been at 2 to 2.5% consistently over the past two years. In the past two quarters, however, the CPI has increased only from 113 to 115.
Answer the following questions with regard to the above data.
1. What is the current inflation rate based upon the newest information available?
2. What are the nation's major economic problems at this time?
3. What things/events might have led to these problems?
4. What phase of the business cycle do these trends and problems indicate?
5. What fiscal and monetary policy measures would you suggest implementing over the next four years?
Explanation / Answer
1) Change in CPI = 115- 113 = 2
Current inflation rate is (2/113) * 100 = 1.7699 %
2) Major economic problems are :- slow GDP growth, high unemployment rate, increase in inflation
3) Reasons can be :-
Inefficient Use of money by Govt. :- To minimise the impact of 2008 global crisis, Govts in various countries did a lot of spending. Like USA govt bailed out banks, China invested in infrastructure projects. There is a limit to Govt spending huge Govt spending leads to higher fiscal deficit(FD) and increased cost of borrowing for Govt. Due to heavy borrowing by Govt, cost of borrowing for Indian businesses also became high, causing less investment, resulting in less supply, more inflation, less GDP.
Inflation :-It leads to banks having less money to give loans. This causes the interests rates to go up. Higher interest rates means less investment, resulting in less supply, more inflation, less GDP.
4) The trends indicate :-
5) Short run: If interest rates fall then in the short run you may see an increase in GDP as companies take advantage of lower financing costs to engage in new business actvitites. Or if government ramps up spending you'll likely see a rise in GDP as well. Both of these factors will theoretically (at least from some schools of thought) be offset by lower economic acitivity in the future to "payoff" for these short term binges.
Long Run: If more people are working (say through population growth), then ceteris paribus gdp should probably increase. Or if the same number of people are working but they're more productive (I make 5 widgets instead of 2) then GDP will increase.
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