Economics question - help -?

Question

The economy has seen the unemployment rate increase from 6% to 9.5% and the inflation rate decrease from 2.8% to 1.2%. As well, there has been a 24% decline in consumer spending and a 45% decline in investment spending in the same time period.

a. Given the above, what would you predict about the overall direction of the economy? Explain your answer.

b. Describe the fiscal policy that will already be automatically operating, as well as the appropriate discretionary fiscal policy that the government should adopt, given the above situation.

c. Describe the appropriate monetary policy that the Bank of Canada should be operating, given the above situation.

Answer 1

A:

1) Increase in unemployment means decrease in output -GDP  (because of this fall in employment doesn't cover increase in productivity and labor-by-capital substitution).

2) Consumer spending and Investment spending reductions means fall in Aggregate demand.

Conclusion - economy is in recession due to fall in Aggregate demand, also fall in investment may lead to higher costs of production in future (middle-run).

B:

Automatic fiscal policy will include unemployment payments - it will support aggregate demand from falling.

Discretionary fiscal policy will include such demand management tools as gov spending, tax-cuts. This may correct business cycle, support employment and output, also will adjust inflation.

C:

In general money are neutral for economy in long-run.

but easy-money or expansionary monetary policy may support aggregate demand protecting it from falling following ways:

1) Create more lending for consumer spending - will increase consumption thus aggregate demand.

2) Increase investments by making funding cheaper - will increase consumption thus aggregate demand.

But there is also some negative issues (inflation, etc.)