Suppose the economy is in a recession and the unemployment rate is exceptionally
ID: 1121279 • Letter: S
Question
Suppose the economy is in a recession and the unemployment rate is exceptionally high.
1. Explain why Keynes felt “deficit spending” was an appropriate action for government if the goal is to get out of the recession, even though it may hurt the standard of living of the average worker.
2. Show that a technological breakthrough that greatly increases labor productivity could help reduce the unemployment rate without hurting the standard of living of the average worker. (You only need to use the labor market here.)
Explanation / Answer
Suppose the economy is in a recession and the unemployment rate is exceptionally high.
1. Explain why Keynes felt “deficit spending” was an appropriate action for government if the goal is to get out of the recession, even though it may hurt the standard of living of the average worker.
This is because Keynes believed in active role of government in case of a recession. When the rate of unemployment is very high, it signifies the intensity of a recessionary gap. In that case the government should increase its spending on buying goods and services, increase economic activities in the nation that stimulate aggregate demand. Even though that it has to bear a fiscal and budget deficit, it will bring the economy back to the equilibrium position.
2. Show that a technological breakthrough that greatly increases labor productivity could help reduce the unemployment rate without hurting the standard of living of the average worker. (You only need to use the labor market here.)
Such a technological shock will increase the demand for labor. When that happns, real wage rate, producction all are increased. This would increase aggregate output and short run AS shifts to the left. Hence such a shock will reduce unemployment, increase income and so the standard of living of the average worker is not hurt.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.