Question

QUESTION [20 MARKS]

Construct a discussion on the different ways that government intervenes in your country. Support your discussion by citing real life examples of such intervention from reliable sources.

Answer 1

Since the early 1980's, countries across the globe, have been expanding their business operations and have become market-based economies, wherein government intervention is close to 0 in the markets. These economies are also known as Market Based economies, whereas those where government decides on what goods and services are to be manufactured are known as centrally planned economies.

Even, when markets are left alone however, the problem of recession or inflation which are cyclical variations may take place and require some degree of government intervention to keep the economy afloat.

We have the classical example of the Corona Virus Pandemic which has just started and during which most economies such as the United States, United Kingdom etc have seen significant government intervention in the form of decreased taxes or increased government spending.

The government of United States began the Cares Act for an example, to be able to provide stability to their economy, wherein they increased spending on health care and provided a relief of 1200$ for anyone who was earning about 75000$ a year. Such direct transfer payments help in keeping aggregate or total demand in check which largely helps the economy to remain stable.

During a recession as people do not have sufficient flow of money, the total demand for products and services declines. This in turn leads to losses for firms as they are unable to sell and unemployment also rises as firms start making losses.

During such a time, if the government reduces the tax burden or provides direct relief as the government of United States has done for the vulnerable sections of the society, the aggregate demand in the economy remains stable and this leads to the problem of recession being less threatening to the market based economics. In the long run things return back to normal and the economy becomes much more stable.

Please feel free to ask your doubts in the comments section.