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Japan experiencing economic downturn IB coursework

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Word count ;732 Japan is experiencing an economic down turn. An economic downturn is when the economy worsens and is going towards 2 quarters of negative growth, a recession. Japan has unveiled a stimulus package worth 107 billion $ in order to prevent the 2 quarters of negative growth. Such Keynesian economics is an attempt to increase economic growth and prevent short-term unemployment. Diagram 1 Keyntian Keynes believed that governments had a responsibility to manage the economy and prevent unemployment, he believed that governments should spend money on national projects in order to boost real output. as we can see form the diagram above an increase in government spending would shift aggregate demand from AD to AD1 and increase real output from Y1 to Y2 and closer to the full employment output of Y(f). ...read more.


Neo-classical diagram 2 Japans reliance on Keyntian policies to fend off the economic downturn would indicate a shift of economic priorities away from inflation and towards unemployment. This trade off was theorised by Phillips. The diagram below shows the Phillips curve which illustrates the negative relationship between inflation and unemployment. As we can see low levels of unemployment are usually associated with high levels of inflation. However Phillips perspective is short run view of this relationship. In the longer term it has been suggested that in fact there is no trade off. As we can see from diagram 4 increases in AD lead to short term increases in output(Y(f) to Y1) with equivalent increases in employment along the short run Philips curve. However as we know the increase in output beyond full employment eventually leads to rise in business costs and therefore SRAS will shift to the left to SRAS1 and full employment level of output. ...read more.


The effect of this can be seen in the diagram below. As a result of the supply side policy LRAS shifts from LRAS to LRAS1. as a result potential real output increases and prices fall from P to P1. The problem with this is that these policies take a long time to come to effect and as Keynes said "were all dead in the long run". With a shrinking economy and continued inflationary pressures Japan's response is complicated by the potential problem of stagflation. This is illustrated below. Here we can see that SRAS shifts from SRAS to SRAS1 causing an increase in prices and a fall in output. This is most likely to have been caused by the higher cost of energy in Japan. If Japan continues with demand management we can see this would cause further inflationary pressure as AD increases to AD1. it is even more essential therefore that demand management is accompanied by supply side policies. ...read more.

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