The paper "Econometrics for Economic and Financial Analysis" is a wonderful example of an assignment on macro and microeconomics. As a policy advisor, the best action that I would recommend is a rapid reduction of deficits amidst the risk of lower growth because any move contrary to this would translate into continued adverse effects on the economy such as high-interest rates and inflation (Nachrowi, 2006). As such, appropriate measures must be implemented towards the reduction of budget deficits (Nachrowi, 2006). The high-interest rates and inflation would dissuade investments from foreign investors thus leading to slow or failure by the economy to recover or further contraction the economy.
Reduction of deficits would contribute to the lowering of the interest rates with the consequent strengthening of the economy through a lower domestic currency value. The economy’ s exports would have a lower market value whereas the imports become more expensive (Boye & Melvin, 2013). Rapid reduction of budget deficits in the short run would translate to an increase in employment because a country whose exports are cheaper due to a low currency value would export more goods (Copeland, 2008).
This would increase the safety net spending, reduce the revenue earned from the imposed taxes, and partially offsets the austerity measures. Government expenditure contributes to the GDP of an economy and therefore reduction of this spending would lead to a higher debt-GDP ratio. The high debt- GDP ratio can be reduced by the reduction of budget deficits where the government ought to either increase its taxes or reduce its expenditure (Boye & Melvin, 2013). Rapid reduction of deficits would reduce the money supply as the government may decide to buy short-term gilts from the banking sector.
In such a situation, the banks would overlook the fact that these gilts are near the money of which they can maintain investors’ borrowings and customer lending (Nachrowi, 2006). Reduction of government expenditure would reduce the Gross Domestic Product (GDP), which would subsequently lower the Aggregate Demand (AD). The ideology only holds in the short run when budget deficits are rapidly reduced. In the long run, the reduction of government spending would result in reduced inflation due to the reduced demand and lower costs of the input prices.
However, So long as there is a depression of output, the economy would only experience negligible inflationary pressure.