Question

a) Describe two costs of unanticipated inflation.

b) When is the best time to monetarise a budget deficit in terms of limiting any adverse inflationary effect?

c) Outline the concept of hysteresis and explain the likely cause of this phenomenon.

d) How does Okun’s law relate to unemployment?

e) There is growing community concern that unemployment will rise with disruptive technologies, artificial intelligence and automation. How should government economic policy react to this?

Answer 1

a) As a result of unanticipated inflation

1. the creditors loose , they will receive the money which has less purchasing power.

2. The people who depend on the social security services loose as they will be able to buy less due to the price rise.

b) The best time to monetarise budgetary deficit is when the economy is having low level of inflation. When we monetize budgetary deficit it will increase the liquid cash with the public which inturn increases the purchasing power of the people and leads to inflation.

c) The concept of hysteresis states that even after recessionary phase is over and the economy is recovering , the level of unemployment will not decrease. The main causes for this to occour are

1. The unemployed people are now adjusted to the low standard of living.

2. As the economy progresses there will be upgradation of the production techniques and the workers are skill deficient.

d) According to Okun's law, if the unemployment increases by one percent there will be decrease in the potential GDP of a country by two percent.

e) When there high degree of automation or introduction of artificial intelligence in the economy the government should

1. provide job training and re _training programmes

2. change the hiring practices in order to meet the needs of the current economic structure.

3. increase the investment in those sectors that are less affected by the process of automation.

4. encouraging new enterpreneurs .