Labadan, Lyka Mae S.

CBET-01-502A

Economic Development

1. Define carefully the difference between movements along the AD curve and shifts of
the AD curve. Explain why an increase in potential output would shift out the AS curve
and lead to a movement along the AD curve. Explain why a tax cut would shift the AD
curve outward

The curves of aggregate demand (AD) and aggregate supply (AS) are used to
resolve economic concerns such as economic growth and economic crisis, causes of
inflation, and changes in the level of unemployment.
To tell it is a shift or a movement, we must consider the factors that is causing
the change. If the cause is a change in the price level, it is a movement along the curve.
If the cause is something other than a change in the price level, the entire AD curve will
shift.
The aggregate supply curve shifts to the right as productivity increases or the
price of key inputs falls, making a combination of lower inflation, higher output, and
lower unemployment possible. However, the aggregate supply curve shifts to the left as
the price of key inputs rises, making a combination of lower output, higher
unemployment, and higher inflation possible.
In the long-run, increases in aggregate demand cause the output and price of a
good or service to increase. On the other hand, the aggregate supply is affected only by
capital, labor, and technology.
The tax cut shifts the aggregate demand curve outward for the normal reason
that disposable income and also consumption rises. As the natural rate of production
increases, it pushes the long-run aggregate supply curve outward.
The impact on the short-run aggregate supply (SRAS) curve of the tax cut
depends on the model you are using. The labor supply curve moves outward since,
although the labor demand curve is unchanged, employers are able to supply more
labor at any given real wage.

References:

 https://analystprep.com/cfa-level-1-exam/economics/movements-along-and-
shifts-in-aggregate-demand-and-supply-curves/
 http://faculty.haas.berkeley.edu/arose/PS13.pdf
  https://www.khanacademy.org/economics-finance-
domain/macroeconomics/aggregate-supply-demand-topic/macro-changes-in-
the-ad-as-model-in-the-short-run/a/shifts-in-aggregate-supply-cnx

2. “Even if the government spends billions on projects such as Manila Bay white sand,
military arms, and other wasteful projects, this action can create jobs in a recession.”
Discuss.

Let us first define what recession is, a recession is a period of declining

economic performance across an entire economy that lasts for several months.
Recessions are visible in industrial production, employment, real income, and
wholesale-retail trade. The working definition of a recession is two consecutive quarters
of negative economic growth as measured by a country's gross domestic product.
With a record fall in the second quarter, the Philippine economy dropped into
recession for the first time in 29 years as strict lockdown measures destroyed economic
activity and prompted the government to significantly cut its 2020 GDP estimate.
Covid-19 is the most serious health crisis the world has experienced in a century
and it could also be one of the biggest destroyers of jobs in human history. During these
times, the government should take care of its citizens in terms of healthcare, food
security as well as their survival.
Going back to the statement given, the statement is already invalid because in
times of recession the employment rate decreases because most of the business closed
their stores and organizations or big companies terminate their long-term employees to
cut costs into their operations.
When lockdown begins, everything just stopped. No transportation, no
education, almost all business is closed therefore all businesses are just surviving these
times. I think those projects by the government is good not just on these times although
the budget for those projects have been allocated two years ago. I am not against those
projects but I am against the timing of it. They should`ve postponed it instead.

References:
 https://uk.reuters.com/article/us-philippines-economy-gdp/philippines-suffers-
first-recession-in-29-years-braces-for-grim-year-on-virus-woes-idUKKCN25208X
 https://www.investopedia.com/terms/r/recession.asp#:~:text=A%20recession
%20is%20a%20macroeconomic,as%20a%20rise%20in%20unemployment.
3. The growth of nations depends crucially on saving and investment. And from youth we
are taught that thrift is important and that “a penny saved is a penny earned.” But
will higher saving necessarily benefit the economy?
This statement is called a paradox of thrift which is developed by John Maynard
Keynes, the paradox of thrift or paradox of savings, is an economic theory which states
that personal savings are a net drag on the economy during a recession. This theory
relies on the assumption that prices do not clear or that producers fail to adjust to
changing conditions, contrary to the expectations of classical microeconomics.
According to Keynesian theory, the proper response to an economic recession is
more spending, more risk-taking, and fewer savings. Keynesians believe a recessed
economy does not produce at full capacity because some of its factors of production like
land, labor, and capital are unemployed.
Keynesians also argue that consumption, or spending, drives economic growth.
Thus, even though it makes sense for individuals and households to reduce consumption
during tough times, this is the wrong prescription for the larger economy.
To sum up, paradox of thrift is a concept that if many individuals decide to
increase their private saving rates, it can lead to a fall in general consumption and lower
output.

References:
 https://www.numerade.com/questions/the-growth-of-nations-depends-
crucially-on-saving-and-investment-and-from-youth-we-are-taught-that-t/
 https://www.investopedia.com/terms/p/paradox-of-thrift.asp