Answer to Question #290991 in Macroeconomics for ayesha

Question

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

$Solution$

Due to the decline of GDP in general which has unemployment effect ,fall in stock market and national currency value ;

The government will stimulate the economy through appropriate expansionary policy . They will increase the government spending to enable flow of cash in the economy at the same time lower interest rates to enable borrowing for businesses this will stimulate slow but steady recovery of the economy affected by the pandemic.

Through the banking sector the government of Pakistan can reduce the amount of reserve requirement this will encourage lending and spending hence freeing some cash to the economy which will stimulate growth.

Due to the pandemic economy decline from Ye to Y1 , use of expansionary policy will stimulate growth hence aggregate production from the AE2 to potential AE1.