Economics Assignment - Economic Fluctuation | Question and Answer

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to question 1.......................................................................................................................2
Answer to question 2.......................................................................................................................4
Answer to question 3.......................................................................................................................6
Reference list...................................................................................................................................8

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Answer to question 1
Business cycle
Economic fluctuation is the evolving concern for the policymakers. The data states that
economic growth rate is sometime turned into negative as well as into positive. These economic
fluctuations are reported to give regressive impacts on the economy’s employment rate. The
economy is supposed to have recessive while output level continues to fall. During 1960 and the
early 1970s the economy experienced a sharp rise in the aggregate price level as well as
improvement in the average demand in the market. This outcome contradicts the general
economic theory as it has been assumed that increase in price level results in the contraction in
the demand level. In this regard, the tax cut is considered as the propelling force behind the
augmented demand. Tax cut had improved the disposable income of the general people.
However, this does not guarantee stability in the economic growth. As a consequence of that, the
economy again faces recession even after having an impressive economic growth (Mankiw 2019
p -80).
Importance of less /low fluctuation
As per as h book, low fluctuation in the business cycle leads the economy to the stable
position. This enhances the investment confidence and encourages the stakeholders to invest in
the economy (Mankiw 2019 p-260). Low fluctuation will improve the overall the production
level for the economy.
Looking forward, the book states that the following factors are responsible for the
economic fluctuations in the short run.

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Taxes and interest rate: Hike in interest rate and tax reduces the consumption level and then
economy tends to move into the recession. On the other hand, decreasing tax rate and interest
improves the consumption level, which in result, leads the economy to the expansion.
Fluctuation in the investment: Investment is the core parameter to ensure the economic
progress. The significant improvement in the investment level helps the economy to reach peak.
Employment: The change in the employment can influence the business cycle movement in the
short run.
Inflation: Fluctuation in the inflation rate is accountable for the different phases in the business
cycle as an effect of long-term impact.
Next emerging risk in 2019 and how to tackle it in the kingdom of Saudi Arabia
According to the book, the intensity of the fluctuations is not only observed in the short
term also in the long term. In this regard, the global finical crisis is considered as the pot effect of
the sudden fall in the economic progress in the third quarter of 2007. Thereafter, the
unemployment growth had been raised by four times from 4.7% to 8.5%. All these short-term
fluctuations in the employment coupled with the output level are termed as the business cycle.
As far as the book is concerned, the data and information on the Saudi Arabian economy with
respect to 2019 is missing. Therefore, on the account of current study, the declining oil price
over the last couple of years in the international market can be reflected as the emerging risk for
the Saudi Arabian economy. Recently, the government has viewed to bring changes in the
structural development process. This is expected to cause huge employment opportunity in the
manufacturing sector instead of the oil sector. Therefore, this may cause structural
unemployment in the economy.

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Answer to question 2
The natural rate of unemployment refers to the unemployment rate which brings
equilibrium in the labor market. The economy will have full employment if the original
unemployment rate gets equal with the natural rate. The natural rate of unemployment considers
only structural and frictional unemployment. Cyclical employment is not considered the part of
the natural rate. According to the book, the steady-state of labor market is the determining factor
for the natural rate of unemployment rate. (Mankiw 2019 p-165). According to the steady- state
model, L is total labor force, E is the number of employed and U refers to the unemployed
person. Therefore, L = E + U and the unemployment rate equals to U/L. Suppose f is the rate of
job searching. Then the steady-state condition in the labor market will be fU = sE, where s
denotes the rate of job separation. Now, E can be written as (L-U). Hence, fU = s (L-U).
Now, by dividing both sides by L the equation becomes,
f U
L = s (1 - U
L ¿
Or, U
L = S
s +f = 1
1+ f / s
The above equation implies that steady-state of the unemployment rate U
L depends on the
job separation rate s as well as job finding rate of f. The higher the degree of separation rate
results in the higher unemployment rate.
In terms of the long-term effect, the natural unemployment rate aggravates the structural
unemployment condition of the economy. According to the Phillips curve, the relationship does
not work for the inflation and unemployment rate in the long run. Inflation cannot improve the

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wage rate in the long run. Therefore, change in the wage rate does not give impact on the natural
rate of unemployment in long run.
Policy recommendations for lowering the rate and why
Better education and job training skill: This empowers the labor force with more educational
and technical skills. This causes improvement in the employability of the labor force.
Creating job opportunity: The authority must leverage job opportunity for the workers so that
they can actively participate in the work force. A number of people will be employed as a result
of increasing employment opportunity.
Flexibility in the labor market: This enlarges the employment opportunity for the labor force.
This allows the labors to work as per their choices and preferences.

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SRAS 1
SRAS2
AD
Real GDP (Y)
Y
Price
P1
LRAS
P2
Answer to question 3
Stagflation in AD-AS framework
Figure 3: Stagflation reduces output level and increases price level
Source: (as created by the author)
Stagflation refers to the period when the economy comes across emerging inflation
coupled with increasing unemployment. This further leads the economy to the recession.
According to the figure 3, price level has found to increase from P1 to P2, which in turn, reduces
the Real GDP from Y1 to Y2. As a result of that, Short Run Aggregate Supply (SRAS) curve
deceases from SRAS1 to SRAS2. Adverse supply shock hikes the cost prices if the aggregate
demand keeps constant. According to Fed, accommodate supply shock decreases the output level
below its optimum level.

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Government policy to correct output lost in the short run
It has been observed that increasing productivity is the most perfect solution to counter
the output lost in the short run. In this way, the economy will reduce the dependency on the
foreign goods and services. There, the demand for the domestic goods will be enhanced
intensifying the domestic production level.
Cost of governmental policy
The government expenditure must be surged up in order to boost the average production
level. Stagflation hikes the average price for commodity and service in the market. This reduces
the purchasing power of the consumers. Hence, the government needs to incur huge cost in terms
of providing subsidy or implementing the tax-cut method to encourage the aggregate
consumption level.
How to correct both inflation and output lost simultaneously
According to the Solow model technical progress along with the population growth is
considered as the golden rule of the economic growth (Irfanlal.yolasite.com 2019). The steady
state model is expressed as follows: (MPK - α) = (n +g), where MPK = marginal product of
capital, stands for steady state growth of total income is defined as (n + g). If net marginal
product of capital exceeds the growth rate, the economy will have lower saving rate coupled with
less capital (Mankiw 2019 p- 226). It is stated as a golden rule to correct both inflation and
output lost simultaneously.

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Reference list
Irfanlal.yolasite.com.(2019). http://irfanlal.yolasite.com/resources/N.%20Gregory%20Mankiw
%20Macroeconomics%2C%207th%20Edition%20%20%20%202009.pdf