Reference no: EM133085452

The covid-19 pandemic has put our economy in a recession resulting in job losses pushing the unemployment rate up to 12% compared to the 7% average in 2020 prior to the pandemic as outlined by (Jackson, 2021). Aggregate demand also declining due to the impact of strong Covid-19 containment measures implemented to limit people movement has further contributed to the downturn in the economy. However, Jackson (2021) argues we are now seeing where we are recovering from the downturn post the 8.6% decline in GDP in the second quarter in 2020 to 2.9% which is the current estimate. This is supported by actions taken by the Jamaican government and I believe with further actions such as what was done in the UK, we could stabilize the economy even further.

There are two types of gaps that can occur within an economy a) inflationary gap occurs when the actual GDP of an economy is above potential GDP. This usually results in sustained increases in the price levels causing a rising inflation rate and signifies an overheating economy. b) The second gap that can occur is classified as a recessionary gap that happens when an economy's actual GDP is below its potential GDP. It usually results in low levels of productivity and causes the unemployment rate to increase due to firms cutting back on production capacity because of declining demand. Based on the points cited in part A of this paper both the UK economy and the Jamaican economy experienced a recessionary gap during the Covid-19 pandemic. I will now explore further how the UK government used fiscal policies to support closing this recessionary gap and make recommendations for how Jamaica could adopt a similar approach to stability in the local economy.

In order to close this gap, the government can employ the use of two types of Macroeconomics policy (a) Fiscal policy which is directed by the government and looks at how to decrease/increase government spending and define the tax impact on the economy. (Secondly, (b) are monetary policies that are directed by the central and look at how we manage interest rates. When an economy is experiencing a recessionary gap as explained above the actual GDP is below potential GDP or in other words, the aggregate demand curve has shifted downwards to the right, and therefore in order to correct this the opposite must occur by shifting the AD curve upwards (to the left) to achieve GDP equilibrium where total demand equals total supply. To shift the AD curve upwards (to the left) one of the following variables must be influenced, consumer Wealth, price level, real interest rate, future income expectation. Consumption according to Demand-side Equilibrium & Changes on the Demand Side PART 1 is primarily determined by one's level of disposable income. The more money an economy has to spend on goods and services the higher the likelihood of increased consumption.

Our recommendation to the government of Jamaica would be to utilize strong fiscal policy such as increasing government spending and lowering taxes in the short term. As such, the following recommendations are proposed as cited by the actions taken by the UK government. The first recommendation is for the government to provide provision to support and give financial security to the people who can't work due to their sickness, and strong business incentives to firms for protecting their employee's jobs. This would help to mitigate against more persons falling into unemployment, maintain aggregate demand due to income stability, and help to give security to the marketplace which can experience draconian shifts when business confidence falls. Secondly, the UK government provided a strong pillar by supporting the innovative firms with the amount of £1.25 billion. This injection of cash into the innovative sector reinforced the government's commitment to supporting a sector that will be needed to lead the next generation of growth and development for the UK economy in the future digital landscape. A similar approach could be recommended to the Jamaican government to sure-up critical knowledge base and expertise in the local innovative sector that will guarantee our success in this space in years to come after the pandemic is long gone. Third and final, the UK government also launched a rebate scheme with the intention of reimbursing the SMEs in their Statutory Sick Pay (SSP) costs of up to £2 billion. This is where the government provided support to "businesses with fewer than 250 employees would be met in full for up to 14 days per employee. The Chancellor estimates that this will cost up to GBP 2 billion and help up to 2 million businesses" (Eurofound, 2020). This again was a critical support to SMEs whose operations and profit margins in the UK and Jamaica were significantly impacted. This lifeline can ensure that our SMEs sector survives this economic shock and provide continuous employment to more than half of the Jamaican workfare.

These fiscal policy implementations will lead to an increase in government spending that will directly impact the AD curve by inspiring future income expectations because of the multiplier effect this will have on the economy. When consumers have a favorable outlook based on future income, they are more likely to spend more in the short-term (Demand-side Equilibrium & Changes on the Demand Side [PART 1]). This point is further strengthened by Blinder (2020) who posits that the ability to increase consumer confidence which in turn will inspire business confidence both of which according to Economist Keynes will cause an upward shift (to the left) on the aggregate demand curve.

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Read the above document and write a conclusion on it.