Regarding the following statistics, explain which phase or turning point of the

Question

Regarding the following statistics, explain which phase or turning point of the business cycles, this economy is going through and define the characteristics of this stage . How would the central bank and the government interfere during this period ?                                                                                                                                      

- Economic growth = 4.4 %    Unemployment rate = 3.9 %      Level of inflation = 12.9 %                 

- Deficit in net exports.      Balanced national savings .       Savings more than Investments .      ( 30pts )                                                   

         ( M > X   )                                             (   T = G )                                                  (   S > I )

Explanation / Answer

This is a phase where Net exports are at a deficit, indicating imports exceed exports.

This is justified by the fact that inflation is at double-digit level, signifying aggregate demand is higher than aggregate supply (resulting in higher import demand). At the same time, unemployment is at a low level, therefore, this is perhaps the early recovery phase where the economy is growing.

In this phase, since inflation is high enough, central bank will want to lower inflation rate by restricting money supply, so will engage in contractionary monetary policy. However, that will result in lower aggregate demand, reducing labor demand and raising unemployment rate. Therefore, at the same time, government will like to engage in expansionary fiscal policy by raising government spending and/or lowering tax rate to keep aggregate demand at a boosted level. Together, the two policies will result in lower inflation coupled with higher growth rate.

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