• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Stimulating an economy in recession

Extracts from this document...

Introduction

Ranamae Zamora Economics Assignment: Stimulating an economy in recession March 27, 2007 1. How might a government attempt to stimulate an economy which is in recession? Recession occurs when the economy experiences two consecutive quarters of falling Gross Domestic Product (GDP). GDP is the accounted money value of the goods and services produced in an economy. Recession shows how economic activity slows down and falls over a period in time. The decrease in GDP is shown in figure I where the real GDP trend goes below the potential real GDP. During this period there is rising unemployment, decreased output, decreased consumption and interest rates, and deflation (decrease in price level). A decrease in the components of aggregate demand (AD) such as consumption, investment and government spending as well as an increase in the components of aggregate supply (AS) such as the price of labor and price of inputs would be some of the causes of recession. So to stimulate an economy during this period the government can cause a change in the components of aggregate demand and aggregate supply. The government may use expansionary fiscal policies that influence the AD curve by decreased taxation and increased government spending. A decrease in tax would increase consumption because of an increase in disposable income and would therefore increase AD. This is shown in figure II as a shift from AD0 to AD1 and would be in line with the long run potential output shown by point A. ...read more.

Middle

The same was done in the Bush administration during 2002 and 2003. Tax credit cheques were sent to high income households with children and tax allowances were given to firms allowing them increase investment at a lower cost. The credit cheques were strategically given out during the back to school month to encourage families to spend more and thus increase consumption. Real GDP by 2003 increased at an annual rate of 8.2%. However, in 1970, after the implemented fiscal policies, government debts increased and there was high inflation and high unemployment. In 2003, deficit spending increased the budget deficit in the US; government expenses exceeded receipts. Price levels also increased and the policies did not have a noticeable impact on unemployment in the US. Expansionary monetary policies decrease the rate of decrease in aggregate demand as shown in figure III with the decrease in the shift of AD (AD0 to AD2 instead of AD0 to AD1). This is because monetary policies anticipate inflation and try to solve it earlier. So, interest rates are used to stop excessive changes in AD before they occur. Only an assumption of how inflation would look like and how interest rates would hopefully stop it is made because it takes between two to six quarters until interest rates affect inflation and up to two years until AD is affected. ...read more.

Conclusion

With supply side LRAS increases allowing AD to increase without inflation as shown in Figure V(b) because increased research and labor increase the factors creating a rise in the full employment level of output (Y0 to Y2). Therefore, in the long run, supply side policies are more effective for the growth of the economy because of the increase in output thus increase in real GDP without inflation. However this is only good for growth and when development is mentioned the decrease in social welfare that occurs with the implementation of these policies is unacceptable. Demand management policies help even out the economic cycle and create a stable economy. With the help of automatic stabilizers and discretionary fiscal policies governments steer the economy to achieve economic goals and improve social and economic welfare. Tax rates, unemployment benefits and government spending increase social welfare systems and an increase in living standards is caused by full employment. Unlike the supply side policies demand management involves a lot of social welfare development. It is safe to say that it is better for the development of a country or economy. However as mentioned in the previous paragraph, these policies cause inflation and would be disadvantageous to the economy in the long run. The case of supply side policies is the opposite. It increases output without the risk of inflation but with decreasing social welfare. ?? ?? ?? ?? Zamora 1 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a star student thought of this essay

5 star(s)

Response to the question

This essay strongly captures how the government might stimulate the economy in an economic recession, and evaluates the use of these government policies to a certain extent. The writer begins with very strongly by accurately defining “recession” and this accuracy ...

Read full review

Response to the question

This essay strongly captures how the government might stimulate the economy in an economic recession, and evaluates the use of these government policies to a certain extent. The writer begins with very strongly by accurately defining “recession” and this accuracy is indeed splendid as many students’ idea of a recession is vague in terms of definition. The writer remembers to look past the negative GDP aspect to focus on low unemployment, interest rates, etc as well. The definition of GDP could be more refined. The writer’s approach in explaining that both AD and AS play a role and then elaborating how the components of AD can be affected by expansionary policies is commendable for its clarity. Such links lined up with real-life examples puts the issue in a realistic aspect and makes the essay flow logically. Throughout the essay, the writer also makes clear reference to the graphs and diagrams, but the bad aspect is that these diagrams do not appear properly. The evaluation section is very well done in that the writer discusses the strengths and weaknesses of the demand-side and supply-side policies employed to curb recessions. The writer gives a balanced account of these policies and manages to draw a justified conclusion on these policies.

Level of analysis

The essay is deep in its content to a large extent. While the initial part on explaining recession may not be crafted very well, the subsequent section on evaluating the policies is of the great depth. The writer discusses the idea that each of these policies is suitable in handling a certain aspect of recession – demand side policies to boost aggregate demand or supply side policies to reduce unemployment. The writer accounts for long-term and short-term effects of these policies. The writer then zooms in on the stakeholders of these policies, namely the government, the producers and consumers. The writer also elaborates on the advantages and disadvantages of these policies after explaining how these policies are designed to work. A remarkable aspect of this essay is the complex blend of both macroeconomic and microeconomic concepts where relevant. For example, the writer comments on the opportunity cost of economic decisions. A small area for improvement would be to refer to diagrams in the evaluation section as well as to define the economic terms such as opportunity cost, which markers especially look out for. Finally, the wrier could manage to squeeze in a conclusion at the end on which is the best policy in which situations based on the analysis so far.

Quality of writing

The use of technical terms is only moderate. For example, more specificity and accuracy could be shown in the terms used such as the particular type of unemployment prevalent in a recession as well as the technical terms of these “supply side policies”. Definitions for key economic terms like taxation, opportunity cost are lacking as well. Nevertheless, the essay shows immense effort in maintaining a high standard of grammar, punctuation and vocabulary. Overall, this is an excellent piece of economics commentary.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by Arcturus 19/03/2012

Read less
Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    Economic and Social consequences of Unemployment

    5 star(s)

    This is because there aren't enough resources available in the market to meet the demand/ supply. For instance, an increase in demand will put a contstraint in providing equivalent supply due to lack of resources in the economy as there is full employment and everyone is working to their maximum output.

  2. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    Governments should also aim to encourage smaller businesses to compete with larger firms on prices, as it means that instead of competing with businesses of similar capacity you are actually competing with the whole market which means the most efficient producer will prevail. Governments are also advised to adopt deregulation.

  1. Peer reviewed

    GDP, or Gross Domestic Product.

    5 star(s)

    However, there are drawbacks to using GDP per capita as a means of comparing relative standards of living. Some countries use methods of statistical collation which are much more accurate than those used in other countries. For example, the collation technique in Britain would probably be more accurate than in a country such as India.

  2. Peer reviewed

    Explain the possible impact of a world-wide recession on the components of the circular ...

    4 star(s)

    Whilst for savings, the effect on withdrawals is also minimal. As more people are unemployed or have a general decrease in their income levels, it is difficult to save at the same amount as before with a lower income. Thus, the overall effect on withdrawals would only be a slight decline.

  1. What conditions are necessary for a devaluation to improve the BOP? Can a small ...

    The BOP is about the value of exports and imports, not just their quantity. Thus to assess the impact on the BOP of a devaluation we need to consider how much exports rise and imports fall. Price elasticity of demand (P.E.D)

  2. ECONOMICS PAST PAPER QUESTIONS WITH ANSWERS - price elasticity and inflation.

    Availability of resources: If a firm wishes to expand production, it will need more resources. If the economy is already using most of its scarce resources, then firms will find it difficult to employ more, and therefore, output will not rise. Hence, supply of most goods will be inelastic.

  1. Explain why a change in the budget deficit may lead to a more than ...

    An increase in budget deficit suggests that a government is choosing to borrow money, and we assume that this money would be injected into the circular flow of income in the form of government investment. This should in theory trigger the multiplier effect, particularly if the investment target e.g.

  2. Price mechanism allocates a country's resources efficiently. Do you agree?

    Under the price mechanism, all the goods and services produced have a market price. These market prices are determined by the market forces of demand and supply. Price P in figure 1.5 is the equilibrium price at which quantity demanded equals to quantity supplied.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work