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Low Production and High Unemployment - Essay Example

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Low Production and High Unemployment A country is said to be in an economic equilibrium if there exists no external forces causing disruption, the quantities demanded, and quantities supplied are equal. In the short run, economic equilibrium is achieved via price mechanism of demand and supply…
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Low Production and High Unemployment
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Download file to see previous pages A change in either the demand or the supply will cause a similar shift of the other. However, for an economy to experience sustained economic growth and equilibrium, it must step up its factors of production such as labour, capital, and land. Several economic indicators depict the state of an economy and the stage (Frenkel, Razin 29). The Growth Domestic Product (GDP) is a total market value of goods, and services produced and consumed, investments, minus government spending plus the exports minus the imports. A GDP of a country depicts what is happening now in an economy. Rises in the GDP depicting a rise in the economy while a drop in the GDP depicting a recession. In this scenario, country A has a RGDP, which means that its GDP has fallen. Its economy has shrunk, by the amount of the GDP drop. A Second indicator of an economy is the rate of unemployment that describes an economy after it happens. An increase in the rate of unemployment depicts a lagging economy. A country is said to be in a long run economic equilibrium when no firm in the industry wants to leave or enter the market. In this state, no existing firms make losses and those entering the market make losses. Every firm produces at the efficient cost of production and the maximum profit they can make is zero. This means that price is equivalent to average cost of production (Osborne Web). ...
In country A, high levels of unemployment depict a recession. Country A is not in an equilibrium state, meaning that it has to undertake some fiscal and monetary policies to take it to this level. A fiscal policy is a tool used by the branches of government via either spending or taxes to attain a desired change. It is an act done with a conscious mind and geared towards effectiveness and efficiency. For country A that is in a recessionary period, imposing taxes will make the situation worse. Therefore, first, country A will have to increase government spending in the areas it deems fit. This king of fiscal policy is called expansionary that increases the government spending and decreases the taxes. This will increase the government budget deficit to increase and lead the country to a long-run equilibrium. According to Keynes, a government can achieve a real GDP every year through market mechanisms where it influences prices and wages, which they assume to be flexible. They believed that in a recessional economy one should not wait for the prices to go down but instead an expansionary fiscal policy can be used. The government should ensure that its spending is higher than the current tax receipts. This way the level of unemployment will fall as the unemployed persons get to work in the government projects increasing their purchasing power. Secondly, the government can engage in purchasing of bonds to release more fund to the corporate and to individuals. As people gain purchasing power, they will invest in various categories of businesses or even purchase goods increasing demand. Price levels will go up, employment levels going up and eventually raise the RGDP. Thirdly, to achieve a long run ...Download file to see next pagesRead More
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