The paper "Why Stimulus Will Mean Inflation" is a great example of an assignment on macro and microeconomics. Government borrowing is too high and interest rates are too low in many countries; fiscal stimulus does not work and cheap money leads only to inflation’ . Critically evaluate this view of the policy response to the economic crisis using appropriate theory and evidence. The economic phenomenon of recession is a part of the economic cycle which all ecologists believe a capitalist market experiences after a certain point of time. The phenomenon of recession can be described as gradual decrease in the economic activities in the market or as the contraction of the business cycle experienced by an economy over time.
There are various changes that come about in the macroeconomic factors of an economy in a similar fashion during the period of recession. It is observed that the factors such as the GDP, the employment rate, the investment rate, and the business profit all face a downhill scale during this economic period. If one was to go by the Keynesian theory, a fall in AD then will mean there will be a fall in Real GDP. The level of the confidence level of the consumers in the economy is usually taken as the basic factor on which the rate of economic growth is calculated.
In fact, most economists have stated that these two have a direct relationship with each other. If the level of confidence that is faced by the consumers and the investors in the market is high then interest rates may not reduce, yet at the same time, the opposite also holds true.
If the consumers feel that they will soon be unemployed then they spend less, and due to this the AD in the economy starts to fall. Therefore this shows that expectations are very important and it is possible for “ people to talk themselves into a recession” . Economists are however not completely united in stand over the nuances of recession, and the role of certain factors and such are still a reason of dispute among economists. Most Classical Economists have had the belief that a fall in Real GDP will be short term and will end when labor markets adjust to new price readings.
They further argue that if there is a fall in AD will be manifested, in the short run as a fall in real GDP.
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