Question

1. Using the definition and measurement of GDP as a guide, evaluate how the use of fiscal and monetary policy to combat recession might affect economic growth.
2. Include in your evaluation an analysis of how government policies to combat recession might affect the different types of unemployment discussed in the module. Additionally, discuss how changes in the economy over the last 30 years have affected frictional and structural unemployment.

Answer 1

Solution:

(a) GDP stands for Gross Domestic Product. This is defined as the monetary value of the goods and services produced within the geographical boundary of a nation.

Now, fiscal policy is a government policy which is used to combat both inflation and recession in the economy.

Monetary policy is a policy of the central bank of a nation to combat both inflation and recession in the economy. It is same as fiscal policy but it is a policy of central bank of a country.

According to the question, it is correct that fiscal and monetary policy might affect the economic growth. It is so because :

• The use of fiscal and monetary policy leads to an increase or decrease in the money supply in the economy. This causes a decrease in the production of goods and services when money supply is decreased and vice-versa when money supply increases.
• This causes a negative impact on the economic growth. Economic growth rate will always fluctuate. This will never let a sustainable economic growth in the country.

Hence, from above we can conclude that the use of fiscal and monetary policy affect the economic growth.

(b) Government policies might affect different types of unemployment. It is so because:

• As the population is increasing and resources are limited. So there is an imbalance between number of seats available for jobs and the number of people who wants to get that job. When government introduces policies to combat recession, people gets jobs and when they introduces policies to combat inflation then people lose their jobs. This is creating unemployment situation in the economy.

(c) In the last 30 years there had been a lot of changes in the economy which have affected frictional and structural unemployment. People have left their jobs due to many issues which have put them in  frictional unemployment category. So, are many such examples and it is still counting. So, we cannot estimate it.