Suggested Answers of BT2 Revision Package - ASKnLearn

Explain the impact of high unemployment (cyclical) as a result of the recessionThus a BOT and capital deficit alone can cause output and employment to fall. It is one ofthe key contributors contribute to structural unemployment. The global recession has madethings worse by raising cyclical unemployment rates significantly. The recession resulted in adrastic rise in cyclical unemployment due to the huge fall in AD from exports as Europesuffers from a drastic decline in income and output. Domestic consumption, a key driver ofeconomic growth in the U.S. will fall significantly. These will result in a sharp rise inunemployment, especially cyclical unemployment. High unemployment is harmful to aneconomy as it will result in high fiscal cost to the government. This results in lesser funds forinfrastructural development. In addition, individuals may suffer from a loss of self-esteemand morale, which will worsen the longer they stay unemployed, leading to social problemssuch as rising crime and increase divorce rates.Conclusion: Comparing the relative priority of a BOP deficit over the unemploymentproblem due to the global recessionBoth the BOP deficit and unemployment will cause serious consequences to the U.S.economy. The U.S. government should prioritize to solve balance of trade deficit first as itshould help alleviate the problem of the high unemployment from the recession. Appropriatesupply and trade policies would need to be implemented in order to raise U.S. productivityand develop new growth areas in its industries. This will help to reduce the severe cyclicalunemployment and structural unemployment problem. There is an urgency to stimulate ADand start increasing output and production to provide jobs and income for the people and torestore confidence in the U.S. economy. By rejuvenating its export sector, foreign investorswill regain their confidence in the U.S. and increase capital inflows for investment purposesvia the capital account. Hence, by tackling both the BOT and capital account will solve thebalance of payment problem and eventually pull the U.S. out of the recession.