Answer to Question #159712 in Macroeconomics for Umer

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. 

                                                                                              (2.5 Marks, Maximum 200 words)

 

b.    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.                                                                           (2.5 Marks, Maximum 200 words)

Answer 1

Answer

There are following economic tool to stabilize the economy in recession period.....

1) Monetary (by bank)

2) Fiscal ( by government budget)

Monetary:

6)

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

2)Returning LM and interest rate and income to their original level.

3)Relation between money supply or interest rate and inflation.

4) By the moneysupply in the economy price and wage defiantly go up.

Fiscal :

Government spending and tax policy

Tax decrease - - - $MPC=increase in consumption /increase in income$

1) Government spending increasing decrease in tax.

2) By this continuous cycling of consumption due to the flow of money originally spend by the government would then further increase the aggregate demand the GDP

Public debt to rapid expansion in the state function and cover deficit

3) the gap between the income and expenditure must be filled either by government expenditure or by increasing the MPC.

Conclusion:

Actually in this period, we should adopt counter cyclical policy lead to be desired expansionary of output and employment, monetary policy expansion output and employment.

2)Other hand by fiscal policy.. To boost aggregate demand an increase in government spending or an decrease in tax rate.

3)And disposable income is recycled in the market.

4) Government expansionary fiscal policy or the central bank could do the same by reducing interest rates.

5) Main goal of economic are growth, high employment and price stability

So that in every unbalanced situation we can balance the economy.