Macroeconomic Problems

Macroeconomic Problems
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February 20, 2021
1 Recession is perhaps one of the most dreaded events that every economy around the world seeks to prevent. Generally, recessions are defined as a temporary decline in the economy, particularly when it comes to commerce and trade activities. One of the essential elements is the successive decline between two quarters that signifies the period of recession CITATION Rod20 \l 1033 (Rodeck, 2020). Accordingly, it must be noted that during a recession, the decline in the overall economic productivity is almost always accompanied by a decline in the employment rates due to the fall in aggregate demand.
As shown in Figure 1.6, unemployment rates tend to rise more rapidly as it increases compared to when it decreases. This is most likely because, during recessions, industries are forced to lay off workers to meet the lowered demand, productivity is lowered in companies, and most consumers would tend to spend less given the lack of employment and decreased purchasing power. In contrast, during periods of recovery, employment rates are slower since demand only rises gradually as thousands (if not millions) find it more challenging to find new jobs, thereby making it slower for industries to recoup their losses.
2 Figures 1.8 and 1.9 show why the United States government has suffered from a huge deficit during the 2008 to 2009 recission. Mainly, it could be seen that this increase in government deficit is due to a combination of factors such as the increase in spending despite the fall in taxes.
It must be noted that deficit happens when the government focuses too much on spending without balancing it with a corresponding increase in taxes, which means that both factors are responsible for government deficits. This could be gleaned particularly from both the figures.
On the one hand, it could be seen that during the 2008 to 2009 recission, government spending tremendously increased while taxes were also meager compared to previous years after 1980. This created a massive deficit since the government has consistently increased its spending (outgoing) without balancing it with incoming funds. On the other hand, it could be seen that the total government surplus was also at an all-time low in the same period since surplus is just the opposite of deficit. Thus, since taxes were lowered while spending was increased, the total surplus also decreased.
3 The variability in inflation rates before and after the year 1985 shows a stark difference. On the one hand, variability in inflation rates before 1985 is very high. For example, inflation rates show a remarkable difference in just the year 1950 when early 1950 rates were negative while investment rates during the mid-1950s went as high to almost 10%. This was in stark contrast to the years after 1985 when variations in the inflation rates are steady and controlled.
One of the likely reasons for this shift is the policies imposed on reducing money growth rates after 1985. Since the money supply is decreased compared to the previous years, inflation was also decreased and controlled.
4 The Macroeconomic theory explicitly states a positive relationship between the inflation rate and the nominal interest rates through time. Accordingly, these changes affect the real interest rates since the latter is merely computed by subtracting the actual rate of inflation from the nominal ...