Question answers on growth economics
The economic growth is necessary for the development for a country. Without the growth, the country cannot be developed. In this case, various types of policies are there for which the growth can be achieved.
“Economic growth is the most important macroeconomic objective because of the effects of slow growth on the economy and individual”
Evaluating the statement with examples:
Without the economic growth, a country cannot be able to move forward and the welfare of the country will not be maximized. In order to achieve the economic growth the strong governmental policy is required and the participation of the people is also needed. In this regard, the with the help of the economic growth a developing country can become a developed country and welfare of the country will be maximized.
The economic growth is the objective of a country’s economy in order to achieve the objectives the country can adopt the policies and practices. In this case, there are various types of macroeconomic tools by using these tools the country can be able to achieve the higher economic growth. In this regard, the slow economic growth cannot help the country to achieve the prosperity and the development. The government of an economy can adopt the economic policies and reforms in order to achieve the higher economic growth. Apart from this, the objective of the government is to remove the macroeconomic problem from the economy in order to foster the growth. In recent days, the short-term growth is not the objective of the government. In this case, the long term or the sustainable growth is necessary for an economy and it can bring the development of every sector of the economy. In this case, there are several types of policies (Abdymomunov, 2014). Apart from this, the government can be able to use the different kind of macroeconomic tools for which the long-term growth can be achieved by the country, lots of problem of the economy will be solved, and the economy can be able to reach in a stable situation. In this connection, one thing can be stated here that, if the economy can be able to achieve this stability then the economic fluctuations cannot harm the economy.
In this case, there are various types of macroeconomic indicators and the growth of those indicators can identify the ultimate growth of the economy. In this case, the first macroeconomic indicator is the employment and if the government of a country is able to reduce the rate of unemployment then automatically the country or the economy can be able to achieve the higher economic growth. Apart from this, another macroeconomic indicator is there and that is inflation. The rapid inflation is not acceptable, and it harms the economic prosperity (David and Reder, 2014). In this case, the objective of the government is to reduce the inflation rate and the mild inflation fosters the economic growth. In this case one thing can said that, there are opposite relationship among the inflation and the unemployment. If the inflation rate will rise then the unemployment rate will reduce. In this case, if there is an increase in the inflation rate then the price level will increase. As a result of this, the producer will increase the level of output and in effect of this the labor demand will increase. Therefore, due to increase in inflation rate the rate of unemployment will reduce. In addition to that, the government can reduce the interest rate in order to achieve the higher economic growth rate because due to low interest rate the investment will be increased within the economy (Segal, Shaliastovich and Yaron, 2015).
In this regard, the government of an economy has different macroeconomic tools in order to control the economic growth one is the monetary policy and second one is the fiscal policy. There are expansionary fiscal and monetary policy and contractionary fiscal and monetary policy. By using these, the expansionary fiscal and monetary policy the higher economic growth can be achieved (Asplund, 2013).
Therefore, from the above discussion it is clear that without the fiscal and monetary policy, the country cannot be able to achieve the economic growth and in order to achieve the sustained growth the strong governmental policy is also required. The expansionary fiscal policy and monetary policy is appropriate to achieve the growth but sometimes the government can adopt the contractionary fiscal and monetary policy in order to achieve the sustained growth. It is depend on the economic condition of the country.
“The use of key and composite indicators of economic performance in conjunction with the aggregate demand-aggregate supply model assists in identifying and understanding the four phases of business cycle”
Evaluating this statement with examples
The economical condition of a country can be categorized on the basis of the aggregate demand and aggregate supply. The aggregate demand and aggregate supply is totally related with the condition of an economy. In this case, one thing can be stated that, based on the aggregate demand and aggregate supply the condition of the economy can be described.
Each and every economy has the four phases and the phases of the economy is related with the macroeconomic indicators. In this case, the four phases of the economy is the prosperity phase, recession phase, depression phase and recovery phase.
In this regard, the aggregate demand and supply curve show the relationships between the various price levels and the quantity of goods and services in the economy. In this case, if there is any fall in the price level then the depression or the recession phase can arise and if there is any increase in the price level then there will the recoveries or the prosperity phase of the economy. In this case, the because of the sustained fall in the price level of the economy the depression phase of the economy will arise (Michaillat and Saez, 2015). In this case, sustained hike in the price level can be the cause of rise of the prosperity phase. In this case, there are some features of the economic phases and the factors of the aggregate demand and aggregate supply will be connected with those features in order to show the impact of the aggregate demand and aggregate supply model. Apart from this, any one phase of the economy can arise for some other factors and in this case, those factors will be discussed here:
In case of aggregate supply, the supply shocks can increase or decrease the output level. If there is an increase in the output level then there will be a reduction in the price level, which can be identified as the recession phase, and if there is a sustained reduction in the price level then the phase of the economy can be identified as the depression. In case of recession phase, the economic activities will be slow down and there will be a steady decline in the output, income, price and employment. The government should adopt the policy in case of recession in order to avoid the condition of the depression and ion this case, the government can adopt the expansionary fiscal policies in order to increase the aggregate demand (Benhabib, Wang and Wen, 2015).
Figure 1: Aggregate demand and aggregate supply model
(Source: self developed)
In there is any increase in the price level of resources then the price of the output will be increased and the producers will be attracted by this increased price level and they will be interested to increase more goods for which the there will an economic prosperity and there will the high level of output and trade. Apart from the demand of the economy will be rise because the employment will be higher in the economy (Leduc and Liu, 2016).
From the above discussion, it is clear that, due to the changes in aggregate demand, aggregate supply there will be the fluctuation in price and quantity, and based on this fluctuation the economic condition can be described.
Using the expenditure multiplier concept and circular-flow model, make a critical evaluation of the likely effects on the Australia’s economy when Australia’s major trading partner like China experiences a boom.
The circular flow model describes the money supply of the economy and it describes the process how the money circulated within an economy. Now in the global economy whole world can be considered as a single economy and each and every economy is interdependent and in this case also the circular flow model can be will be appropriate.
On the basis of the macroeconomic circular-flow model, the household and the firm is interdependent. In this case, the firm is taking the factors of income from the household like land labor and capital. In this case, the household is taking the factor income from the firm like rent, wage rate and interest rate. In this case, if any fluctuations in the firm the household will be affected and the income of the household will be affected. In the same, way if there are any fluctuations in the household then the firm will be affected and this will happen because of the interdependency between this two sectors of economy (Jeong, Kang and Kim, 2017). In this case, if one sector is incorporated that is government then a part of income of the household will be shifted to government as tax and the government will use this tax for preparing the infrastructure for the firm. In this case, one more thing can be stated that, for the infrastructure the business of the firm can be flourished. As result of this, the income of the household can be increased. Therefore, the circular flow model can describe the interdependency of the economic sectors and in this case, the model can be able to state the process of the economy.
In the same way, the Australia is the major trading partner of China as a result of this the Australian economy and the economy of China is inter dependent. In this case, if, the Chinese government has adopted the expansionary fiscal policies then there will an increase in the government expenditure for which the economic growth or an economic boom will be in the Chinese economy. In this case, the Australian economy will be able to experience the economic boom. As a result of this, the Australian economy can be able to experience partial economic prosperity and able to increase the income (Li and Mayraz, 2016).
Figure 2: Expenditure multiplier
Therefore, it can be said that, by using the expenditure multiplier model the economic boom of Chinese economy can be experienced in the Australian economy. In addition to that, the Australian government can achieve the higher economic growth due to the economic boom in the Chinese economy (Taylor and Tyers, 2017).
From the above discussion, it is clear that, two economies are there Australia and China is totally dependent on each other and the economic growth of each country is also related with each other. In this case, the economic boom in China affect the economic activates of the Australia. In this regard, the circular flow model is too much relevant for both the country.
It is clear from the above discussion, without the macroeconomic policies, the economic growth cannot be achieved. In this case, a proper macroeconomic tool has to be used in order to achieve the higher economic growth.