Imf Report Evaluation Case Solution
Extend your thoughts into the questions; why low/less fluctuations are desirable?
In the wake of the fluctuation’s adverse effects over the growth of the economy; there are various measures which are taken by the government of a country, in order to control the cyclical fluctuations. Additionally, through the expansionary and contractility policies; the business cycle is controlled by the central bank. Hence, there is a period of the recession of global pandemic; the government must tax less & spend more.
The 2008’s financial crises and current pandemic created the circumstances in which the counter cyclical fiscal policy – a variation in the government budget surpluses and deficit aimed at stabilizing the economy – became the policy of choice. The fluctuation in the GDP (total output of the nation) has greatly affected the unemployment, which is the serious hardship for people. Additionally, the high fluctuation also tends to result in lower per capita potential output level of economy, in the long run.(Dickens, 2010).
It is pertinent to note that the monetary policy’s attempts to lower the unemployment and the fluctuation in the nominal GDP by manipulating the growth rate in the money supply. The strategy is to increase the growth of money during the periods of recession (higher unemployment) as well as reduction of the growth of money during the period of inflation (excess expansion).
In addition to this, the fluctuation in the business cycle influences different segments of the society in different manner. In the contractility phase; the poor and unskilled worker tend to suffer more as compared to the well-off and skilled segment. Furthermore, the business cycle tends to have an asymmetric effect over the household falling in various income tiers, which is that all the individual could fully insure themselves against the risk of income. A world where financial markets are imperfect, incomplete and economic agents have no access to these markets, accomplished the fluctuation in the business cycle having long lasting consequences of distribution. Particularly, in the low-income as well as emerging economies; financial markets are underdeveloped & only a small proportion of the households have an access to the formal financial system. For that reason, the aggregate macroeconomic fluctuations have long term as well as pronounced distributional effects in such-economies.
Hence, the high fluctuation has a native effect over the growth of the economy.Also, there is a negative relationship between the long term growth rates of countries and the degree of persistence. When the volatility tends to increase; the per capita growth of GDP reduces. Additionally, the relationship between business cycle and growth varies with the level of development. Given the adverse impact of the fluctuation over the economic growth; the government strives to avoid the fluctuation and ensures that the level of fluctuation is low.(khan, 2018).
We know the long run economic growth depends on some fundamental factors, then if those are not changing what makes the economy fluctuate in the short run (i.e., put the economy into a recession); What could be the next emerging risks in 2021 and on wards compared to the stable growth period (sometimes known as the Great moderation period until 2008)?
There are some fluctuating factors, which the long run economic growth is dependent on. These fluctuating factors are as follows:
- Productivity Growth Rate.
- Changes in Demographics.
- And, Participation of Labor Force.
The productivity growth rate is the ratio between the outputs and the inputs. The inputs might be the labor, capital, materials, services and energy or electricity. If the firms or industries’ productivity or an economy’s productivity increases; it will decrease the cost of goods manufactured. A decrease in cost will decrease the price charged from customers, which will ultimately affect the supply and demand curve as well as the equilibrium price. In short, an increase in demand of any particular product or services will lead towards an increase in total revenues, which is simply known as the growth of the productivity,which will positively impact the long run economic growth……………………
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