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Subject:
Mathematics & Economics
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English (U.S.)
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Topic:
HOW TO REDUCE UNEMPLOYMENT RATE AND KEEP THE PRICE LEVEL LOW
Essay Instructions:
The following question should be answered in paragraph form. You should address each of the sub-parts completely. You will need to make some calculations. You should show your work so that you could receive partial credit if you make a mistake.
Assume an economy where the current economic conditions include:
Unemployment stands at 10% and the Full Employment level is 5%.
Inflation is running between 1 and 2% on an annual basis
Long term interest rates are 2% and short term are near zero
Assume that the GDP is nominally at 14 Trillion Dollars
What actions, if any, should policymakers take to increase employment and keep the price level low? Please include the following information in your answer…
Your specific approach to fiscal policy or not? (20 points)
Your specific approach to monetary policy or not? (20 points)
What is the recessionary GDP gap as described in Okun's Law? (10 points)
What are the risks of your approach, in the short term? (10 points)
What are the risks of your approach, in the long term? (10 points)
There will be 20 points allocated for the overall strength of your answer based on use of information from the course. So in the appropriate part of your answer make sure you mention at least four of the following:
Deficits, Aggregate Demand, Aggregate Supply, Exports, Imports, the Fiscal Multiplier and the Money Multiplier.
There are a final 10 points allocated based on the quality of writing and considerations such as grammar and spelling.
I would anticipate that the exam will be at least three pages double spaced.
Essay Sample Content Preview:
Student name:
Student Number:
Instructors name:
Subject: Mathematics and Economics
HOW TO REDUCE UNEMPLOYMENT RATE AND KEEP THE PRICE LEVEL LOW
Both fiscal and monetary policies can be used to reduce unemployment rates in the short run while maintaining stable prices of goods and services. This is an economy experiencing recessionary gap and either of the two policies will stimulate growth and reduce unemployment levels without devaluing the currency.
Employing fiscal policies of cutting taxes and increasing government spending during recession will increase aggregate demand, AD, for goods and services hence creating a fiscal multiplier effect on the economy and this will create more jobs and reduce unemployment.
The central bank in this economy should therefore employ fiscal policy by cutting down taxation and increasing government spending to inject more money in the economy which will be invested to create more employment opportunities. However, more money in the economy may result inflationary pressure and may push the prices of goods and upwards.
Increased government spending and reduction in taxation means less money is available to finance the expanded budget leading to budgetary deficit which may force the government to borrow money to finance its expenditures.
Reducing tax levied on businesses and individuals in this economy will leave them with more money to spend which increases consumer demand for goods and services in the economy experiencing recession. Increased money supply and consumer demand may lead to a decrease in the value for money hence reducing its purchasing power hence pushing the rate of inflation and prices of goods and services upwards.
Decreasing taxation increases spending power of consumers and supported with increase in government spending through government buying of more services from the economy market like building roads and schools creating more jobs and wages. This money is in turn pumped in the economy “pump priming” leading to economic growth and reducing overall unemployment levels.
Increased money in economy in turn reduces the demand for credit facilities further pushing down the cost of credit, interest rate resulting into more borrowing for investment which in turn creates employment opportunities.
However, fiscal policies can only reduce unemployment levels resulting from the reduced aggregate demand for goods and services but cannot solve unemployment resulting from reduced aggregate supply. Structural and frictional unemployment cannot therefore be solved by fiscal policy interventions for they come from the supply side of goods and services.
This economy is in recession and unemployment is caused by reduced demand for goods...
Student Number:
Instructors name:
Subject: Mathematics and Economics
HOW TO REDUCE UNEMPLOYMENT RATE AND KEEP THE PRICE LEVEL LOW
Both fiscal and monetary policies can be used to reduce unemployment rates in the short run while maintaining stable prices of goods and services. This is an economy experiencing recessionary gap and either of the two policies will stimulate growth and reduce unemployment levels without devaluing the currency.
Employing fiscal policies of cutting taxes and increasing government spending during recession will increase aggregate demand, AD, for goods and services hence creating a fiscal multiplier effect on the economy and this will create more jobs and reduce unemployment.
The central bank in this economy should therefore employ fiscal policy by cutting down taxation and increasing government spending to inject more money in the economy which will be invested to create more employment opportunities. However, more money in the economy may result inflationary pressure and may push the prices of goods and upwards.
Increased government spending and reduction in taxation means less money is available to finance the expanded budget leading to budgetary deficit which may force the government to borrow money to finance its expenditures.
Reducing tax levied on businesses and individuals in this economy will leave them with more money to spend which increases consumer demand for goods and services in the economy experiencing recession. Increased money supply and consumer demand may lead to a decrease in the value for money hence reducing its purchasing power hence pushing the rate of inflation and prices of goods and services upwards.
Decreasing taxation increases spending power of consumers and supported with increase in government spending through government buying of more services from the economy market like building roads and schools creating more jobs and wages. This money is in turn pumped in the economy “pump priming” leading to economic growth and reducing overall unemployment levels.
Increased money in economy in turn reduces the demand for credit facilities further pushing down the cost of credit, interest rate resulting into more borrowing for investment which in turn creates employment opportunities.
However, fiscal policies can only reduce unemployment levels resulting from the reduced aggregate demand for goods and services but cannot solve unemployment resulting from reduced aggregate supply. Structural and frictional unemployment cannot therefore be solved by fiscal policy interventions for they come from the supply side of goods and services.
This economy is in recession and unemployment is caused by reduced demand for goods...
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