Answer to Question #127259 in Macroeconomics for Naafu Peter

Question

Q1. Covid-19 pandemic has caused a reduction in aggregate demand in Ghana, with the aid of a diagram/diagrams discuss any four fiscal policies and four monetary policies that can boost aggregate demand.

Answer 1

Fiscal Policies

The diagram aims at increasing Aggregate demand .Therefore the government will increase spending (G) and cut taxes (T). Lower taxes will increase consumers spending because they have more disposable income (C). This will tend to worsen the government budget deficit, and the government will need to increase borrowing.

a) The government can issue a fixed cash payout to every every Citizen above 18 years so that the citizens can meet their daily basic wants together with the younger ones.

b) Emergency tax reduction can help the citizens to utilise the little income they get to sustain them during the period of Covid-19.

c) The government can increase spending i. e by coming up with community projects that will benefit the society so as to increase the amount of income flowing in the economy, this will help citizens earn income and satisfy their basic needs.

d) Reduction of costs of payments for essential assets like electricity and water, this will help citizens to demand for this essential assets and cushion them during the period of the pandemic.

Monetary policies

The economy is originally in a recession with the equilibrium output and price level shown at Er. Expansionary monetary policy will reduce interest rates and shift aggregate demand to the right from AD0 to AD1, leading to the new equilibrium (Ep) at the potential GDP level of output with a relatively small rise in the price level.

a) Manage Inflation - if the inflation is on the rise, the federal reserve may adjust monetary policies to reduce inflation hence the aggregate demand will be boosted.

b) Reduce unemployment - After the rising of inflation has been reduced, the expansionary policies can then be implemented to help reduce unemployment hence citizens will have an opportunity to work and earn income that will help satisfy their needs.

c) Liquidity support to banks - This helps banks to support lending to the real economy, hence people will have access to loans that will help them demand for items.

d) Balance currency exchange rates - The Central Bank of Ghana can opt to issue more currency so as to increase money supply, i.e domestic currencies become cheaper as compared to foreign currency.