Answer to Question #158882 in Macroeconomics for reyan

Question

The Government of Bangladesh opted for expansionary fiscal policy to fight economic depression. Identify the type of inflation it is expected to create and its impact on the wages. Illustrate the process on the graph.  

Answer 1

Economic expansionary fiscal measure taken by the Bangladesh government to combat crisis caused by economic depression has the importance of availing funds, money and other economic resources to the citizens. However, there are other associated economic disadvantages such as excessive demand for products that cold results in inflation. For example, a step by the government to lower taxes, increased government expenditure on projects to create more employment, or increased industrial development to meet high demand has an impact of availing more money to the citizens for either investment or daily expenditure which leads to increased demand. Demand for the labor associated with more projects tends to increase in wages providing people with more income to spend. 

The graphs indicate an increased demand resulting from more income that shifts the aggregate demand curve to the right. Small growth in the GDP has a larger impact on prices where prices change to a large extent from P1 to P2

Non-uniform changes in the GDP and prices produce a curved shaped aggregate supply curve in the long run with slightly fewer supplies to meet a large demand.