ok. so if the unemployment rate is at five percent, inflation is at an annual rate of ten percent, the prime interest rate is 11.5 percent, and the annual growth rate of real GDP is five percent, what are the major problems that the economy is facing??
thanks a bunch!!
Update:so what fiscal policies can fix it?
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Unemployment rate has a natural factor, if your using the States, about 4% is natural unemployment. Is the GDP going up or down from previous year? The interest rate is high. With a wild guess, your heading into a recession. Usually a high interest rate may indicate a 'slowing of the economy', sort of likened to a brake system on a train.
Unemployment rate/GDP growth rate are all acceptable in the example.The only problem is the inflation rate is too high---
Expectations of inflation may arise, further fuelling inflation eg a wage-price spiral and labour unrest may occur as workers seek wage rises to maintain real income.Savings discouraged eg if the rate of interest is 8% and the rate of inflation 10% the real rate of inflation is –2%.Those on fixed incomes will lose out eg pensioners receive annual increase but prices rise monthly or even daily. Uncertainty about future prices make it hard for individuals and firms to plan and discourages.The price mechanism becomes distorted because people find it difficult to distinguish price movements associated with changes in the demand and supply for particular goods and services from general increases in the price level, resulting in an inefficient allocation of resources.
Well, this depends on factors not mentioned. The questioner clearly does not know their stuff. They probably want you to say that inflation is too high, and to be truthfull it is a little above optimum. However, dumb economists tend to exaggerate the costs of inflation. 10% inflation is acceptable as long as it is stable. The real problem is that the real interest rate is only 1.5%. Unless this is Switzerland, that is probably unsustainably low. The central bank is probably expanding too fast. This will result in accelerating inflation, which will have to be brought under control by tightening. This tightening will be devastating for output and employment.