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How might government policy response to drought will modify the macroeconomic impact of the drought?

How might government policy response to drought will modify the macroeconomic impact of the drought?

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Answer #1

At the time of drought we can expect that the price of the grains and the food will be high. There will be unemployment in the sectors related to the food processing and catering. And the overall demand in the economy will be low as most of the income of the family will be spend on the food.

Government at this time can increase the demand by increasing its spending and decreasing the taxes. it will further increase the price of the available grain, but it will increase the demand in other sector and reduce unemployment in the market. It will cause the interest rate to rise and savings will also increase.

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