A9.Doubledip.03jun

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Introduction:

Globalisation the word means a lot because it shook the economy of almost every

nation. Talking about the economy, a recent disaster occurred in 2010, the entire world

submerged in recession. Most of the European Union countries were victims of this economic

crisis. Ireland is also a victim, but the difference with Ireland, it is the first European country

to get recession attack. In this report we have been describing about the recession and various

types of recession. The report is formatted such a way that it explains all the questions put

forward for the research. In some questions, a statement is being asked to describe to the

context. The researcher have also explained what measures can be taken in order to boost the

economy and push the GDP to positive side of the graph. Keynesian stimulus package is

explained and how using stimulus package the economy can be boosted is also discussed.

Various policies used for economic recovery are given among which the monetary policy has

been explained in detail and he changes it can bring to the Irish economy.

Recession:

It is the state of the economy of a country where GDP rate or GNP rate falls under the

saturation level then the economy is in the period of recession. In other words we can tell

recession as the contraction of business cycles or the activity around the economy is slowed

down.

GDP or gross domestic product is defined as the market value of all the goods and

services produced in a particular geographical location.

GNP or Gross National Product is defined as the market value of all goods and

service produced in a year by an individual or a labour.

Figure 1: GDP of Ireland showing the Double-dip recession. [Ref: 4]



Double-dip Recession:

This type of recession where the GDP tend to grow after a fall for a quarter or 2, then

again falls below to the negative side, this type of situation where only for a short period the

GDP is positive is called double-dip recession.

Ireland recession period is related to the double-dip recession because in the firstquarter of 2010 there is a rise in GDP by 0.3%, but by the second quarter it has fallen to

1.2%. The Figure1 above shows the double-dip recession of Ireland.

There are many reason for this behaviour of GDP, one main reason is the economist

of Ireland must have used some stimulus for the economy and hence due to that stimulus for

a short period of time the GDP stayed positive.

The financial crisis started in the year 2008 for Ireland, September 2008 was the

month in which government officially announced the economy of the country was in

recession. This announcement made after the reports of GDP came and also the

unemployment rate increased very drastically, this concluded the entire picture of recession.The Irish property market is in crisis and over-exposed which is a lead from the financial

crisis of 2007-2010. As predicted by ESRI there was a contraction of the economy by 14% in

the period of first quarter of 2010.

The statement ³during the second quarter of 2010 the GDP fell by 1.2%´ indicates the

period of double-dip recession in Ireland as mentioned above. Although the GDP has showed

a rise in the first quarter of 2010 by 2.2%, the second quarter was a fall down where the GDP

was reduced by 1.2% which clearly indicates the recession period is not yet over for Ireland.

Stimulus Packages: Now looking at the GDP, the recession period of Ireland is confirmed and the

economist is trying different strategic plans for the economic boosting. John Maynard Keynes

introduced a stimulus package known as Keynesian style stimulus packages. The theory

behind this stimulus package is Keynesian theory which is a derivation of macro-economic

theory. Aggregate demand is the parameter which is getting a stimulus boost up for economic

recovery by Keynesian model.

Aggregate demand is the defined in statistical formula as

AD = C + I + G + (X-M)

Where,

C ± Consumer spending on services and goods, which includes the demand for

house holds appliances and non-durable stuffs. This type of spending accounts 65% of AD.

I ± Capital Investment, spending on capital goods like lands, machines, factory

products etc. these spending accounts for 20% of GDP in a given year.



G ± Government spending, in normal year this spending can cause up to 20%

of aggregate demand. These spending are made by government on state goods and services.

X ± Exports of goods and services

M ± Imports of goods and service

The policies which affect the aggregate demand (AD) are expectation policies,

monetary policies, fiscal policy and change in international economy.

The plot of AS/AD model is given in the figure, various factors affects the shift in AD

curves. Using this model it is been possible to raise the level of output and price. Aggregate

demand can be varied by injecting the monetary stimulus into the economy, but the

combination AS/AD plot is given so the factors influencing the shift of both curves are

discussed below,

The factors or events which shifts the AD (aggregate demand) towards the right are

Increase in consumer spending

Increase in intended inventory investment

Increase in the government spending for goods and services

Increase in the transfer of payments from the government to the people etc

The factors or events which shifts the AS (aggregate supply) toward the positive side

of the graph are,

Decrease in hourly wage rates

Increase in the capital stock

Transforming the capital and labour into output effectively

Population inflation

If the economy of a country behave in a way that if both the AD and AS curve shifts

to the right simultaneously by satisfying all the above factors then it may be confirmed that

the economy is recovering from recession because the GDP has also increased in accordance

with the curve.

Eff ects of Monetary Policy towards Aggregate Demand:

Other than monetary policy effects there are some other factors which have its impact

on the aggregate demand. Spending on households, business spending on firms etc is other

factors which are used to identify the demand for goods and services. When the spending are

more there is a shift in AD. The downward slope noticed in the AD plot is due to the high

interest-rate effect. The expansionary monetary policy means that increase in aggregate



demand. The plot below represents how the monetary policy affects the aggregate demand

and by expansionary monetary policy there will be a rise in the aggregate demand in turn it

will reduce the interest rates, this is the expansionary monetary stimulus used at the time of

recession to stimulate the economy. It also tries to channel more savings into investment thus

by expanding the economy.

Figure 2 : AS/AD curve and the effect of monetary policy on the curves and GDP [Ref : 7]

Conclusion:

On analysing the GDP of Ireland for year 2010 it is confirmed the recession is not

recovering. An official announcement by the government of Ireland was made on confirming

the recession period of the Irish economy. Many analysis are performed by the analyst and

economist on the GDP of different quarters in a year, but by seeing the 1st

quarter report they

were really happy on seeing the GDP has an increase by 0.8% and some of them came to

conclusion the economy is recovering from recession, but other waited for other quarterly

results. When the 2nd

quarter GDP report came which confirmed there is a fall in GDP by

1.2% which confirmed the non-recovery of Irish economy from recession.

Various stimulus methods are available for injecting into the economy so that the

GDP will increase, in this research, the researcher has discussed about the ³Keynesian

stimulus package´ under which many policies functions. Among the policies Monetary

Policy is one which is used for the injecting stimulus into the economy. According to the

researchers one of the main reasons for GDP in Ireland going down is increase in the rate of

unemployment, so monetary policy increases the aggregate demand which will automatically



reduce the interest rates and hence the government spending will increase which will brig

more opportunities to the economy means increase in the rate of employment.

Ref erences:

A9.Doubledip.03jun

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