Answer to Question #158842 in Macroeconomics for nimra

Question

COVID-19 all around the world has restricted the economic activity. To stop the spread of the virus Pakistan like many other countries adopted the policy of smart lockdown. Shutting down of the industry has created adverse supply shock in the economy. While, the slowdown in business and economic activities the country is in the recessionary phase of the business cycle as the GDP growth for the FY 2020-21 is expected to be -0.2 accompanied by high unemployment and poverty rate.

a.      Reflecting on the above situation justify whether the State Bank of Pakistan should opt for easy or tight monetary policy as a stabilization policy. Also illustrate it graphically.  

a.      Reflecting on the above situation justify whether the Government of Pakistan should opt for expansionary or contractionary fiscal policy as a stabilization policy. Also illustrate it graphically.                                                                            

Answer 1

Answer :

Economic goal-1) Growth 2) High employment 3) Price stability

In COVID 19 around the world face many problem like

Due to lockdown 'adverse supply shock' thats why we face recession.

There are many ways to come out this situation.... By stabilization policy

1) Monetary policy :

1) The supply of money in the economy to achieve some of inflation and out put stabilization.

An increase in the money supply shift LM to the right, lowering the interest rate and increase the income the price level rises in the long run

2)In recession, consumers stop spending.

3) Monetary policy is the counter cyclical tool of choice.

4) Counter cyclical lead to be desired expansion of output and employment.

5) Money supply increases - - increase in price - - increase demand - - increase input cost - - - wages increase

6) Monetary policy raises the interest rate, individual and business trend to borrow less and save more ( this could shift AD to the right).

7) Investment for capital goods.

8) COVID 19 can cause demand shock if they have limited earnings and cause consumers to buy fewer goods.

9) It indicates relation among money supply or interest rate and inflation.

B) Fiscal policy :-

The government can try a recovery through an expansion fiscal policy or the central bank could do the same by reducing interest rate.

2) The result will be a higher real GDP also high inflation

3) To boost aggregate demand an increase in government spending or decrease in tax rates.

4) By this continuous cycle of consumption due to the flow of money originally spend by the government would then further increase the aggregate demand and GDP.

5) Tax decrease - - - MPC increase.

6) Disposal income is recycled in the market.