Answer to Question #317075 in Macroeconomics for Abby

Question

Three years later, the job market for the Class of 2003 was rather different. U.S. economic growth had slowed to a crawl, and then to a halt. Companies that had stocked up on recent college grads in the tighter labour markets of 1998-2000 found themselves with more than they knew what to do with in 2002 and 2003. They were not eager to hire more. Bonuses and other “perks” disappeared; job offers became scarcer. With the unemployment rate around 6% in May and June of 2003, the job market was far from the worst ever. But it was nothing like the glory days of 2000.

(v) Identify and explain two (2) fiscal policies and two (2) monetary policies that the US government may have used to correct this situation. (6 marks) 

(vi) Use a diagram to illustrate the correction measures. (2 marks)

Answer 1

V)

a)Monetary policy

The contractionary policy may be used to stabilize the economy, whereby the US government can increase tax rates and decrease its spending to slow economic growth. The contractionary policy can also reduce the amount of money in circulation resulting from the increased money supply. 

b)Fiscal policy

Expansionary policy where the government can decrease consumer taxes and give incentives to increase purchasing power and boost the country's economic growth. The government can also lower the borrowing rates and decrease the bank reserve requirements to uplift money supply, increase consumer living standards and increase employment rates. 

VI)

Between 2002 and 2003, the inflation rate increased from 1% to 2.28%. The prices increased by the same rate, and the purchasing power also decreased to 2.28%. The inflation rate of May and June 2003 led to a high unemployment rate of around 6%, and the living standards went down. That is why companies had glory days in 2000 but experienced the worst in 2002 and 2003.