Different countries have different economic policies in place. In addition, because of various other factors like geo-political issues, access to capital, public health infrastructure, political system, etc., their macroeconomic indicators and economic growth rates are different. In your final paper, respond to the following questions:
Report the following macroeconomic indicators for your country: GDP, economic growth rate, public debt, inflation rate (CPI, annual variation in %), policy interest rate, and trade balance.
Discuss the state of the economy of the country you selected. Make sure to discuss if the country is experiencing a recession or an expansion and if there is inflation or deflation in the economy.
Discuss the relationship between GDP, inflation, and unemployment as addressed by the AD-AS model and explore if this is the same relationship as explained by the Phillip’s Curve.
Recommend ONE policy to the central bank of the country, given the state of the economy.
Recommend ONE policy to the government of the country you selected, given the state of the economy.
Discuss the possible short-run and long-run implications of using the monetary and fiscal policies you prescribed in the previous questions.
Discuss the differences in the approach taken by a Classical economist versus a Keynesian economist in solving the macroeconomic issues of the country you selected.
see attached for instructions
Full Answer Section
Inflation is currently at 7.65%, above the Central Bank of Kenya's target range of 5-7%. This is driven by rising food and energy prices. The trade deficit is also widening, as imports outpace exports. This is due to a number of factors, including the global economic slowdown and the depreciation of the Kenyan shilling. Public debt is also rising, and is now at 70% of GDP. This is due to a combination of factors, including the government's budget deficit and the cost of servicing existing debt.
Relationship between GDP, Inflation, and Unemployment
The AD-AS model is a macroeconomic model that explains the relationship between aggregate demand (AD) and aggregate supply (AS) in the economy. The model shows that an increase in AD will lead to an increase in both output and prices. Conversely, a decrease in AD will lead to a decrease in both output and prices.
The Phillips Curve is another macroeconomic model that explains the relationship between inflation and unemployment. The model shows that there is a trade-off between inflation and unemployment. In other words, a lower rate of inflation can only be achieved at the cost of higher unemployment.
In Kenya, the relationship between GDP, inflation, and unemployment is complex. On the one hand, the government's efforts to boost economic growth have led to a decrease in unemployment. However, this has also put upward pressure on inflation. The Central Bank of Kenya is now facing the challenge of trying to balance the need to keep inflation in check with the need to support economic growth.
Policy Recommendations
Monetary Policy
Given the current state of the economy, I recommend that the Central Bank of Kenya maintain its current policy of gradually raising interest rates. This will help to cool the economy and bring inflation down. However, the Central Bank should also be careful not to raise interest rates too quickly, as this could stifle economic growth.
Fiscal Policy
I recommend that the government of Kenya implement a fiscal consolidation plan to reduce the budget deficit. This could involve raising taxes, cutting spending, or both. Reducing the budget deficit would help to reduce the government's reliance on borrowing, which would help to lower public debt.
Short-Run and Long-Run Implications of Monetary and Fiscal Policies
In the short run, raising interest rates will likely slow economic growth and reduce inflation. However, in the long run, raising interest rates can help to promote stable economic growth and low inflation.
Reducing the budget deficit will also have both short-run and long-run implications. In the short run, it will likely lead to a decrease in government spending, which could slow economic growth. However, in the long run, reducing the budget deficit can help to lower public debt, which can free up resources for private investment and economic growth.
Classical versus Keynesian Approaches
Classical economists believe that the economy is self-correcting and that government intervention is not necessary. They argue that if the economy is left alone, it will eventually reach a state of full employment and price stability.
Keynesian economists believe that the economy is not self-correcting and that government intervention is necessary to stabilize the economy. They argue that the government can use monetary and fiscal policy to increase aggregate demand and reduce unemployment.
In the case of Kenya, I believe that a Keynesian approach is more appropriate. The Kenyan economy is not self-correcting, and government intervention is necessary to address the current economic challenges. The government's use of monetary and fiscal policy can help to stabilize the economy and promote sustainable economic growth.