So something odd is going on in this country.
Remember we talked about, how inflation and unemployment usually move
in opposite directions if aggregate demand is driving the economy.
But here we see them moving in the same direction.
They're both going up together.
So, there's a very good chance an, and, you know, this isn't very technical.
This is just eyeballing the data.
There's a very good chance that something's happening
on the aggregate supply side of the economy.
That maybe the aggregate supply curve has shifted inward to the left,
which as you know, and you can draw it now if you'd like.
Which as you know gives us equilibrium where inflation
is higher and GDP is lower and unemployment is higher.
Looks like what could be happening to that country in years three and four.
So, I hope that all of you thought about this aspect of
the countries reality, of its macroeconomic
reality, and made use of deregulation.
Because remember deregulation in the good sense right?
We don't want to just deregulate but changing
some of those laws in the country which we
know are obstacles to doing business reasonably, would move
the arrow at supply curve outward to the right.
Okay.
If you were able to do that then you would have seen in
your results, that the country got some
growth with declining inflation and declining unemployment.
So if you experimented with the
deregulation option, which is a supply side
option, you could see the effect of supply side measures on an economy.
Another thing to think about in this country is the interest rate.
Now if you look at the figures for Country 1, you
see the interest rate is extremely high and you wonder why.
And probably the answer that you came up with
was there's a lot of inflation in this country,
so we need to control that inflation with a
restrictive monetary policy, even though we're in a recessionary gap.
And that's reasonable.
You can use one tool, you can use
your monetary policy to try to control the inflation.
Maybe use your fiscal policy to try to get back up to equilibrium.
It's interesting to look at this monetary policy and think of it
in light of some of the things we said in earlier sessions.
For example, did any of you take the monetary policy,
interest rate, excuse me, and subtract from it the inflation rate?
If you did that.
If you took the interest rate given in the case.
Subtracted from it the inflation rate.
You will see that real interest rates are very, very high in this country.
And they stay almost the same all the way through.
They drop a little bit in year four.
So obviously authorities are following a policy that's very restrictive because,
that real interest rate is well above the GDP growth rate.
And this is something we want to ask ourselves about.
There's a good chance in this country actually that
interest rates are being used to stabilize the currency.