Answer to Question #159331 in Macroeconomics for Nimra

Question

a. 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.              (2.5 Marks, Maximum 150 words)

b. Assume the Pakistan’s economy is in recession: Pakistan implements a combination of expansionary fiscal and monetary policy. In the absence of complete crowding out what will be the effect of these policies on each of the following: (2.5 Marks, Maximum 150 words)

      i. Aggregate demand in Pakistan

      ii. The price level in Pakistan

      iii. Interest rates in Pakistan

Answer 1

a. Bangladesh's government is using the Expansionary fiscal policy which means the government is either spending more on the economy or it lowered the tax rates.

This results in either government cut income tax or the government will increase its investment in public work schemes, this government spending would create jobs, increase incomes and lead to greater aggregate demand which ultimately increases the wages of the worker.

The graph of the impact of Expansionary fiscal policy is as follows:

b. Pakistan government implements Expansionary fiscal and monetary policies the impact of such policy on Aggregate Demand, Price level, and interest rates are as follows:

i. Aggregate demand in Pakistan will increase due to an increase in the money supply in the market.

ii. The price level in Pakistan will also increase because of the free flow of funds in the market.

iii. Crowding out weakens the impact of fiscal policy. But in absence of complete crowding out the interest rates will increase.