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Proposal: Economic Plan to Overcome Recession
Introduction
A recession is a significant decline in economic activity in a country or around the world,
lasting for several months or even years. It is also defined as a decline in gross domestic product (GDP) or negative economic growth for two consecutive quarters. And if it occur in my country I has a will apply both monetary and fiscal policies
1. Monetary Policy Measures
Basically monetary policy is the management of money supply in the economy carried out by the central bank
As in the picture, we have an upward line representing the money supply and a downward line representing demand. The black line as you can see when the money supply shifts to the right, it intersects the demand curve at the new equilibrium point. At this point, interest rates decrease and businesses will then encourage businesses or individuals to borrow more capital and money, leading to an increase in GDP.
Policy, dividing monetary policy into two parts: expansionary and contractionary, expansionary when the economy faces recession, and contractionary when inflation is too high. Based on this, in this case we will choose the expansionary measure.
a. Discount Rates This is the fee that commercial banks have to pay when borrowing money from the central bank. When the central bank increases this amount, commercial banks are forced to increase lending interest rates, thereby reducing the number of borrowers, leading to slow economic growth. In the case of using expansionary policies, discounted rates decrease, leading to lower interest rates, thereby stimulating consumption and investment in economic recession. It is shown through the graph when we have a new equilibrium point running from E1 to E2.
b. Open Market Operations(OMO)
In the case of economic recession, when the money supply in the market is too low, the government will buy back T bonds. At that time, the amount of money pushed out into the market will increase, leading to the supply curve also shifting to the right, thereby stimulating investment and consumption, leading to an increase in GDP.
Graph: o An increase in the money supply shifts the LM curve rightward, increasing equilibrium GDP.
2. Fiscal Policy Measures
As we know, GPD: Y = C + I + G + NX. When there is an economic recession, for example,
during the covid period, we can see that personal spending decreases because people have a saving mentality, and at the same time, investment will also decrease due to the double impact of that. At that time, we can use another policy, which is fiscal policy. It is basically the stimulation of G in the formula. It is government spending equal to taxes minus social spending (social welfare, public construction or defense spending). According to the graph, we can see that in the long run, we have an unchanged total supply (S). When we increase government spending, it means that demand increases, causing the AD1 curve to shift to the right (AD2). From there, the new equilibrium point shifts from E1 to E2, thereby increasing GDP. Including expansionary and contractionary fiscal policy, and in the case of a recession, we will use expansionary policy through the following tools: a, Tax When the government reduces taxes, many businesses will want to produce because the tax deduction will decrease, so profits will increase, thereby stimulating production. b, Public spending When the government spends a lot on society, there will be contracting companies, implementing parties, which leads to job creation. Besides, when the government spends a large amount of money, the demand for money increases, which makes the AD demand curve shift to the right, leading to economic growth So it is very suitable for recession. On the other hand, when the government spends a lot on public spending, it leads to people feeling secure when investing and also leads to economic growth.
Overall Economic Impact
By applying both policies, we can influence both supply and demand factors in the economy, thereby being able to flexibly and adjust the economy effectively and quickly to avoid damage when the bad situation persists.
Question 2: Topic That Stands Out
Topic: The Circular-Flow Diagram
Explanation
I really like this content because it gives me the most basic view of transactions.
The circular-flow diagram is a model that represents the transactions in an economy by flows around a circle.
In this we learn bout:
A household is a person or a group of people that share their income.
A firm is an organization that produces goods and services for sale.
Firms sell goods and services that they produce to households in markets for goods and services.
Firms buy the resources they need to produce—factors of production—in factor markets.
From the diagram we can see that it is a closed circle, households are both customers who buy goods from firms and sellers of raw materials that firms use to create goods.
Application of Knowledge
Thanks to learning this content, I understand a lot more about economics, understand the role of households and the company I am working for, and from there know how to care more about them. Thanks to this content, we can clearly see the relationship between salary, spending and production. Besides, this content can also help me create a cash flow map, thereby optimizing costs when I have a dream of owning a business for myself.
