Question

a. Asuume you are an economic adviser for the future President. She tells you that unemployment is at high levels and GDP growth at 5%. She asks you to address the following( answer all): What is a possible cause of this economic condition? How can we solve the unemployment problem and boost the economy?

b.List and explain the pros and cons of protectionism. Consider all groups involved

Answer 1

1 - The possible cause of this situation is the decline in AD. The incressed unemployment resulted in the decline in income level and hence the consumption and investment decreased resulting in low levels of GDP

This can be improved with increased government spending and decreased taxes. The increase in spending will increase the investment in economy. This will increase output and hence decrease the unemployment in economy.

The decrease in taxes will lead to rise in real disposable income. The consumption in economy will increase.

Both these tools will lead to rise in AD and AS of economy , fall in unemployment and rise in Real GDP

2 - Pros of protectionism -

A - It helps to protect the infant industries from foreign competition

B - It helps to increase the producer surplus by imposing a limit on imports and thus raising the domestic price of goods.

C - Due to fall in imports , net export of country rises and this has positive impact upon GDP.

Cons -

1 - Consumers are left with lesser choices in market because of lesser scope to import

2 - Consumer surplus declines and the domestic price of goods is greater than imported goods.

3 - Decline in consumption expenditure will lead to negative impact upon AD.