Monetary & Fiscal Policy, Unemployment, International Trade, Aggregate Demand and Aggregate Supply - Essay Example

Economics [N a m e] Question Monetary & Fiscal Policy In order to stimulate the economy towards economic growth,“Macroeconomic policy” should be used. Tools of macroeconomic policy that would enable the economy to recover from the recession are (Baumol & Blinder, 221-260): 1. Expansionary fiscal policy 2. Expansionary monetary policy EXPANSIONARY FISCAL POLICY: To recover from recession, expansionary fiscal policy should be used. It involves: Reduction in taxes: Government by reducing its income taxes can cause unemployment to decrease and provides an optimistic financial strategy for majority of the employed workforce.

It would also increase productivity and healthy business ethics, both of which would be useful for employers, businesses and overall commerce. A tax cut increases both the aggregate demand and aggregate supply. This increases the real GDP and raises the price level. Reduction in income taxes provides and is the majority of income for the Govt. Taxation gives the Govt. the ability to function and focus on the publics’ interests of expenditures in a specific sector of the fiscal policy. EXPANSIONARY MONETARY POLICY: Similarly expansionary monetary policy enables the economy to recover from recession.

It involves: Decrease in Interest Rates Government by decreasing the interest rates or injecting money into the economy can control recession. Decrease in interest rates increases the aggregate demand, which increases consumption and investment. As a result, real GDP growth and inflation rises. When government decreases interest rates and attempts to decelerate an obvious decline in a specific market or recover from a recession towards economic stability, the demand for lending and credit increases.

Question 2 Unemployment CYCLICAL UNEMPLOYMENT: Marcelle is unemployed because of cyclical unemployment. Cyclical unemployment refers to unemployment that occurs when there are not enough jobs to employ all those who want to work. It happens when there is recession in the economy. If economy slows down, then demand begins to fall. When this happens firms begin to lay workers off as they do not need to produce so much (Baumol & Blinder, 99). Marcelle qualifies for unemployment benefits because one criterion for unemployment benefits is that an individual loss work without any of his own fault i.e. layoff.

FRICTIONAL UNEMPLOYMENT: Dominic is unemployed because of frictional unemployment. Frictional unemployment refers to unemployment that occurs when somebody losses job or chooses to leave job, in order to get another job. This is the unemployment caused by people moving in between jobs for example graduates or people leaving jobs for non-structural reasons like people moving to a new city and etc. So, an individual like this would not qualify for unemployment benefits. SEASONAL UNEMPLOYMENT: Francine has been unemployed because of seasonal unemployment.

Seasonal unemployment refers to unemployment that tends to be higher during certain times of the year either in winter, summer or spring depending upon the country. STRUCTURAL UNEMPLOYMENT: Beauvoir is unemployed because of structural unemployment. Structural unemployment refers to unemployment that occurs due to mismatch of skills in the labor market caused by technological change for example, computers replacing typewriters. It refers to difficulties in learning new skills applicable to new industry and technological change.

Such an individual needs to upgrade themselves in order to keep themselves with the market however, an individual unemployed because of structural unemployment would qualify for unemployment benefits. Question 3 International Trade ADVANTAGES OF INTERNATIONAL TRADE: Two main advantages of international trade are as follows (Baumol & Blinder, 339-360): 1. Foreign trade enables a country to consume goods that either cannot be produced within its borders or production may cost very high. So it becomes cheaper for a country to import those good from other countries through international trade. 2. International trade ensures more production of goods in order to meet the demand of people in different countries.

By increased production, income and employment opportunities increases which increases the standard of living. DISADVANTAGES OF INTERNATIONAL TRADE: Two main disadvantages of international trade are as follows: 1. Main disadvantage of international trade is that production at the local level suffers. Local companies may be vanquished by the international competitors. 2. Secondly, dependence on other countries is considered a disadvantage. For example, a country depending for her food mainly on other countries, there is a serious danger of starvation for such countries in times of war.

Question 4 Aggregate Demand and Aggregate Supply During the period 1973-1974, Macropoland experienced higher inflation rate (i-e, 15%) and unemployment rate (i-e, 13%). During this period, country experienced “Stagflation”. Stagflation occurs when inflation and unemployment rates rise simultaneously, causing an increase in input cost. Sudden large increases in resource costs (known as the adverse aggregate supply shock) push short-run aggregate supply Phillips curve leftward. The adverse aggregate supply shocks distort the usual inflation-unemployment relationship, a leftward shift of the short-run aggregate supply Phillips curve increases price level along with the increase in unemployment rate (cost-push inflation).

At the present, Macropoland is experiencing very sluggish consumption and investment, and unemployment has again edged up to around 9%. Inflation is very low at 0.4%. This is because of “Recession” in the economy. Low aggregate demand yields little inflation and higher unemployment. Aggregate demand would decrease when: Government purchases decreases Expected future incomes or profits decrease Taxes increases Interest rates increases Quantity of money decreases Exchange rate increases or Foreign income decreases.

As a result of all this, real GDP growth decreases and recession in the economy occurs. Work Cited Baumol, William, & Alan, Blinder. Macroeconomics: Principles and Policy. Mason, OH: South-Western Cengage Learning, 2008.