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The Macroeconomic Measures and Policy Final Paper Anthony Peoples Eco 320 Principles of Macroeconomics Dr. Robin Dhakal 10/4/2023

Introduction In this paper, we will examine the macroeconomic indicators of Puerto Rico, including its GDP, economic growth rate, public debt, inflation rate (CPI), policy interest rate, and trade balance. We will also delve into the state of the Puerto Rican economy, identifying whether it is experiencing a recession or an expansion, as well as the presence of inflation or deflation. Additionally, we will analyze the relationship between GDP, inflation, and unemployment, considering the Aggregate Demand-Aggregate Supply (AD-AS) model and the Phillips Curve. Furthermore, considering the economic conditions, we will propose one policy recommendation for the central bank and one for the government. Finally, we will discuss the short-term and long- term implications of these monetary and fiscal policies and explore the differing approaches of Classical and Keynesian economists in addressing Puerto Rico's macroeconomic challenges. Puerto Rico  Report the following macroeconomic indicators for your country: GDP, economic growth rate, public debt, inflation rate (CPI, annual variation in %), policy interest rate, and trade balance. The Current GDP in Puerto Rico in USD Billions is “113.43, a 6.64% increase from 2021”. The Economic Growth rate for the countries is sitting at 3.36%. Puerto Rico finalized its largest debt restructuring: reaching $7.4 billion. The inflation rate for Puerto Rico remained Unchanged from June to July at 2.3%. The average Mortgage interest rate in Puerto Rico is Between 7.5%-8% reigning in 1 percent higher than the continental USA (Paraiso Realty,2022). Puerto Rico’s Unemployment rate is down to 6%. Puerto Rico's Balance of trade is 1310.20 million, its main

trading partner is the US. Puerto has a strong Pharmaceutical Industry that is export-oriented (Puerto Rico Balance,2019).  Discuss the state of the economy of the country you selected. Make sure to discuss if the country is experiencing a recession or an expansion and if there is inflation or deflation in the economy. The unique this about Puerto Rico is that it is the territory of the United States. This means that Puerto Rico uses the US dollars and relies on the US Federal Reserve to Print out money and control the money supply. In this given state I believe that Puerto Rico's economy is currently expanding and has robust Growth for the country. Inflation prices as remained unchanged and are slowly increasing but to countermeasure this there has been a decline in import prices.  Discuss the relationship between GDP, inflation, and unemployment as addressed by the AD-AS model and explore if this is the same relationship as explained by Phillip’s Curve. There is typically an inverse relationship between inflation and unemployment in the short run. When aggregate demand increases, it can lead to higher inflation as businesses raise prices due to increased demand but lower unemployment as businesses will need to hire more workers to meet the increased demand. So, a decrease in aggregate demand can lead to lower inflation but higher unemployment.

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As for the long run, changes in aggregate demand primarily impact the price level, not the real output. The economy returns to a natural level of real output, and changes in aggregate demand only result in changes in the price level. Phillips Curve looks at the short-term trade-off between inflation and unemployment. It suggests that when inflation is low, unemployment tends to be high, and when inflation is high, unemployment tends to be low. This means there's a kind of see-saw effect between them. Policymakers can sometimes choose between having more inflation or more unemployment, but this trade-off may not be stable over a long time because people's expectations and other factors can change it.  Recommend ONE policy to the central bank of the country, given the state of the economy. I would like the Government to Ease monetary policy. Since Puerto Rico has no control over the money supply, I suggest that The US sell more securities to Ease the pressure of inflation rates. During the 2007 financial crisis we saw rates go very low, close to zero and this encouraged more businesses and consumers to want to borrow from the banks more and rely on the income to stimulate the economy.  Recommend ONE policy to the government of the country you selected, given the state of the economy.

If I could suggest something that the government can do is Promote Tourism in the country. From my own experience, people think that a passport is needed to travel to Puerto Rico so it's less encouraged but as people become more aware that it's part of the US it will be seen as a frequent travel destination. If tourism is promoted the government will invest in infrastructure, and build a safe tourism environment which could also create jobs and stimulate income for local businesses.  Discuss the possible short-run and long-run implications of using the monetary and fiscal policies you prescribed in the previous questions. A short-run implication that could be faced by an expansionary monetary policy experiencing lower interest rates can stimulate borrowing and spending, Giving an immediate boost to economic activity. Increased consumer spending and business investments can help reduce short- term unemployment and currency depreciation. The fiscal policies targeting renewable energy, tourism, and small businesses can provide short-term economic stimulus. These new infrastructures help create jobs, enhance the business environment, and stimulate tourism, generating rapid revenue. An expansionary monetary policy may lead to a bubble in the economy. Sustainable growth depends on addressing structural issues like education, infrastructure, and debt management. Meanwhile, fiscal policies are focusing on diversifying the economy, this can reduce dependence on a single industry and promote resilience. Investing in education and workforce training helps create a skilled workforce, attracting new industries over time. Keeping control over finances is crucial for long-term stability and gaining trust from investors. At the same time, improving infrastructure and preparing for disasters protect against future problems.

 Discuss the differences in the approach taken by a Classical economist versus a Keynesian economist in solving the macroeconomic issues of the country you selected. Classical economists emphasize a Laissez-faire approach, where markets are believed to self- regulate and tend towards equilibrium. They suggest that government intervention should be minimal, focusing on maintaining stable monetary policy and providing a robust environment for businesses. In times of economic downturn, classical economists often recommend austerity measures, such as cutting government spending and reducing deficits, to maintain fiscal discipline. They believe that market forces will eventually restore equilibrium and that government intervention can distort natural market processes. Classical economists prioritize controlling inflation over stimulating economic growth. Keynesian advocates for active government intervention to stabilize the economy. Keynesian suggests that during an economic downturn, government should increase spending and lower taxes to stimulate demand and encourage growth. Puerto Rico has a history of financial challenges and could benefit from both Strategies. A Keynesian economist would understand that Puerto Rico has high poverty levels and limited access to capital. Keynesian policies, such as targeted investments in infrastructure, support for local businesses, and initiatives aimed at job creation, can play a pivotal role in revitalizing the economy. These measures are particularly vital given Puerto Rico's immediate requirements and its aspiration for long-term sustainable growth. (Economic Help, 2018).

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Conclusion In summary, Puerto Rico's macroeconomic economic conditions require careful analysis and policies that consider both short-term stabilization and long-term growth. The choices made by policymakers in Puerto Rico will play a crucial role in shaping the future of its economy. The short-run and long-run implications of these policies may vary, with potential consequences for inflation, employment, and overall economic stability. Classical and Keynesian economists offer differing perspectives on how to address these challenges. While Classical economists may advocate for limited government intervention and fiscal hold, Keynesian economists argue for active government involvement during economic downturns. The choice between these approaches should be discussed between the Governor and the US president to understand the goals of Puerto Rico's economy.

References Amacher, R., & Pate, J. (2019). Principles of macroeconomics (2nd ed.). Bridgepoint Education. Paraiso Realty-Mortgaged Home Prices Down 15% in Puerto Rico . (2022, October 31). Paraiso Realty . https://www.paraisorealtypr.com/news/2022/10/31/mortgaged-home-prices- down-15-in-puerto-rico Puerto Rico Archives. Focus Economics. (n.d.). https://www.focus-economics.com/countries/puerto-rico/ Puerto Rico Balance of Trade . (2019). Tradingeconomics.com. https://tradingeconomics.com/puerto-rico/balance-of-trade Puerto Rico GDP 1960-2022 . (n.d.). Www.macrotrends.net. https://www.macrotrends.net/countries/PRI/puerto-rico/gdp-gross-domestic-product Tejvan Pettinger. (2018, May 19). Keynesian vs Classical models and policies | Economics Help . Economicshelp.org. https://www.economicshelp.org/keynesian-vs-classical- models-and-policies/

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