• What is meant by \"supply-side economics\"? • Why must the total value of savi
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Question
• What is meant by "supply-side economics"? • Why must the total value of saving in an economy equal the total value of investment? • Briefly describe the effect of the business cycle on the inflation rate and the unemployment rate. Why might the unemployment rate continue to rise during the early stages of a recovery? • Why might a supply shock lead to stagflation? • Why do economists believe that it is important for the country's central bank to be independent of the rest of the country's central government?
Explanation / Answer
Supply side economics suggests that economy grows only by investing capital that pushes production of goods and services. Consumer are benefitted when the supply of goods and services increases prices are lower ,investnment increases which creates more jobs and employment opportunities.Saving and investment balances the economic growth .This means that whatever is saved should be invested to increase capital accumulation in the country. Business cycle has boom recession and stabiltiy, when the country is in expansion unemployment falls but prices rise due to more output and inflationary pressure sets in. During recovery there is still lack of demand in the economy as economy is sill growing .Thus not enough employment is generated .
Stagflation is a result of supply shock because when there is lack of supply prices rise excessively and due to this economy suffers from high inflation ffor a long time called as stagflation. The economic growth slows and unemployment steadily rises. Central bank should be independent to be able to impact its countrys monetary decisions and if it is controlled by decisions of others , country will face regular business cycle and inflation can get out of hand.
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