Economic Questions
Question 1
The global economic recession was caused by poor banking policies adopted in the United States. The federal government deregulated the sub-prime mortgage industry and massive investments were experienced in the industry (Verick & Islam, p. 3). Sub-prime mortgages have a high risk of default and investing in such portfolio can lead to economic failure. Many investors borrowed money from the banks to finance the sub-prime mortgages business. The massive investment in the industry caused an economic bubble and in 2006 the boom was at its peak. At the beginning of 2007 the economy started to fall due to increase in oil prices and inflation caused rise in prices of basic commodities. Many sub-prime borrowers experienced hard economic situations and they started to default the loans they had borrowed from banks. Generally the economy started to fall because the banks experienced major losses due to failure of many sub-prime mortgage companies (Verick & Islam, p. 4).
The other sectors of the economy were affected because the banking industry unites all other industries. Other countries started to experience the economic meltdown because the economy of the U.S. serves many countries in the world. Other economies in the world were seriously affected and the entire world experienced the economic crisis. Trade among countries caused the economic crisis to spread quickly and the impacts of the recession could not be controlled. The economic crisis was at its peak in 2008 but measures were taken to reverse the effects of the crisis and by the beginning of 2009, many economies had started to experience an economic improvement. To reverse the effects of the global economic recession, international organizations intervened by funding governments and improving trade among countries. Some of these organizations are the World Trade Organization (WTO), International Monetary Fund (IMF) and World Bank among others. By the beginning of 2010 many countries had recovered fully from the economic recession. Measures to improve global trade have been introduced to avoid the recurrence of such crises in future (Verick & Islam, p. 5).
The global economic recession caused inflation in many countries. Inflation is the persistent increase in the prices of products for a given period of time. When the prices increased there was a decrease in the aggregate demand for goods and services. On the other hand, the increasing prices caused an increase in aggregate supply because manufacturers acquired more profits from the sale of products. Taking a country like Kenya (in Africa), the prices for products increased during this period and this caused their demand to decline. For example, the price for food commodities was hiked by great margins and the common people could not afford such commodities. Many people lived a hand to mouth life because the meager incomes they had were entirely used in buying food products (Central Bank of Kenya, p. 11).
On the other hand, manufacturers experienced a boom because they made more profits from the sale of their commodities. This resulted from the high rate of inflation which had set in the economy causing the prices of commodities to rise. Many people in the country were seriously affected by poverty because their purchasing power was reduced. The government of Kenya took the initiative of reducing taxes on basic commodities to improve the living standards of the people. The policy of reducing taxes was adopted as a measure to encourage manufacturers to reduce the prices of basic commodities for the benefit of common people. By adopting this policy, the government aimed at increasing the aggregate demand for goods and services in the country. The central bank of Kenya regulated prices of basic commodities to reduce the inflation that had affected the country during the period. The government continues to implement other measures such as improved regional trade as a measure of regulating inflation and improving the economy (Central Bank of Kenya, p. 11).
Source: Author
From the figure above, an increase in the prices causes an increase in the aggregate supply from AS 1 to AS 2. On the contrary, increase in prices causes a decline in aggregate demand from AD1 to AD2. this relates to the global economic crisis in that inflation was experienced in the country leading to increase in prices of commodities and this affected the aggregate supply and aggregate demand in the economy.
Question 2
Structural unemployment occurs when the people in a country have skills which do not match the labor demand. In such a case, the economy has structures which require different skills than the ones people have leading to a mismatch between the required skills and the labor demand. The economy has enough vacancies for the unemployed but people fail to hold on the employment opportunities due to lack of skills required to perform such jobs. Labor demand is high while the unemployment rate is still high (Franz, p. 3).
Unemployment rate
Source: Author
From the graph above, unemployment rate equals the number of vacancies along line V. To the right of line V, unemployment exceeds the number of vacancies in the economy whereas to the left of line V the vacancies exceed the unemployment rate. Adjusting the demand curve from B1 to B2 will create more employment opportunities in the economy. This can be achieved by increasing the aggregate demand for specific job opportunities in the labour market. Aggregate demand for labor can be increased by creating infrastructures which support more jobs for the unemployed people.
As an economic advisor to the government I would encourage the policy makers to introduce technologies which match the job market. Training centers should introduce curriculum systems which are consistent with the emerging jobs in the labor market. Employers should continuously train their employees on new technologies to ensure that their skills match the emerging job opportunities. Information technology should be well developed within the economy to ensure a good flow of information about new technologies. This strategy will equip the people with enough information about upcoming technologies which can help improve literacy levels.
Alleviating poverty in a country can be attained by introducing economic policies which increase aggregate demand. Poverty affects people when they do not have adequate incomes to purchase basic commodities. The living standards of the people are improved when they have enough incomes to pay for their basic needs. Alleviating poverty in an economy can only be achieved by improving the income levels of the people. The government uses both monetary and fiscal policies to improve the incomes of the people in the economy. To achieve this, proper structures must be put in place to ensure that the people are empowered to work.
Empowering people economically is achieved by providing employment opportunities while maintaining a sustainable rate of inflation. As such, people are able to earn incomes which are sustainable because their purchasing power is high. Inflation reduces the purchasing power of the people because the amount of commodities that can be purchased with a given amount of income reduces when inflation is high. When the purchasing power increases the aggregate demand for commodities also increases (Marx, p. 15).
To improve the purchasing power of the people in a country it would be important to regulate inflation rates. This can be achieved by introducing policies such as price floors and price ceilings to avoid excessive increase in prices for basic commodities. Creating price floors and price ceilings allows manufacturers to price their commodities according to the provided price range. This protects consumers from exploitation by manufacturers and ensures that the consumers have a sustainable purchasing power. Price floors will ensure manufacturers have sustainable prices for their commodities and this protects them against other competitors in the market. Price floors ensure that aggregate supply is favorable and that suppliers make enough profits without exploiting the consumers (Mastrianna, p. 65).
The government can impose the minimum wage policy to all employers to protect employees from exploitation by the employers. This will cause an increase in the purchasing power of the people in the country and create more opportunities for the unemployed. Introducing the policy of minimum wage increases the aggregate demand for jobs and this encourages people to seek training opportunities. People are encouraged to seek skills which are relevant to the modern technologies so that they can obtain job opportunities. Wage floors protect employees from exploitation and encourage them to improve their performance while attracting a large number of skilled personnel in the economy (Hirshleifer, Glazer & Hirshleifer, p. 46).
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