Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy
Local governments and the states face tough fiscal times due to economic downturns. It has been observed that due to this, the state tightens up its fiscal belt and this leads to the slowing down of the economy due to the potential driving down of consumer demand and increasing unemployment. Economic recovery might be further delayed should the state cut down its budget (Islam, Ali & Ahmad, 2011). Therefore, a countercyclical macroeconomic policy is required as it plays an important role in moderating both busts or poor periods and booms- richer periods that would lead to negative effects thereby stabilizing the economy. Expansionary monetary policies, tax cuts, and increased budget on spending are some of the roles the government may have to play during downturns.
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History has proven that this is the only way for all developing and industrial nations. Radical reforms are required to tackle wrong issues affecting the economy and those that elicit tirades. The stability of the economy despite recession lies in the maintaining of favorable monetary policy trends, violating or following the plusses and minuses of simple principles, and establishing sound and credible foundations for monetary policies.
In referring to the plusses and minuses of simple principles, it is important to note that the sustainable fiscal principles must be understood and pursued independently of regulatory or fiscal policies by the industrialized and developing nations. Those principles include addressing undesired balances through reliance on market-based mechanisms, central bank independence, transparency, maintaining inflation-fighting credibility, and through zero inflation (Islam, Ali & Ahmad, 2011).
Increases in primary surpluses, which in other words would be government budget imbalances less net interest or reduction in primary deficits in many developing nations have contributed to lower inflation (Islam, Ali & Ahmad, 2011). The dramatic recession of inflation has been experienced everywhere from the perennially poor African nations to large industrialized nations leading to the achievement of price stability and allowing for measurement error.
It is important to observe that it is due to disinflationary monetary policies that this has been achieved. The central banks have played an important role in squeezing excess inflation and demand by producing capacity by slowing down nominal spending growth. The deficit –the to-GDP ratio of some declining inflation nations have receded while some have increased such as in India (Islam, Ali & Ahmad, 2011). These reforms have created sound monetary policies that have worked ell in enhancing inflation-fighting credibility and the eventual lowering of inflation.
Also, using a matching grant program, the federal government can provide partial financing for state governments. It is important to note that the inherent problems in federal financing will be reduced through matching grants while the Ricardian equivalence will be reduced through co-financing. Federal borrowing during a downturn with regional variation allows the cost of repayment within the harder hit region to be shifted to others.
Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium
Insights into price and wage changes distribution are important when monitoring an economy. This is normally identified through studying the steady, rising, and falling inflation to identify irregularities. Economic equilibrium, a point where both quantities supplied and demanded are equal, balances the forces of the economy (Baimbridge & Whyman, 2003). It is normally affected by external forces. These forces include prices and wages.
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A condition where the goods and services produced equals the amount of needs of the consumers bringing about competition and the eventual stability of the market price is referred to as market equilibrium. The established price of the market equilibrium is the equilibrium price. The adjustment of prices of commodities or services in the market plays an important role in shifting the position of the economy’s equilibrium. A change in demand or supply will affect the stability of the prices hence result in a shift in the equilibrium. Economic equilibrium is dynamic and can be found existing in multi-market or non-market relationships unlike partial equilibrium (Baimbridge & Whyman, 2003).
Being that equilibrium indicates a state of balance, lowering prices of commodities or services will create a new equilibrium in the market due to the disruption of the existing balance. In the same manner, employment and aggregate output cause fluctuations in most economies. The level of employment and unemployment rises and falls during the time of recession. Additionally, during such times, unemployment remains high and the labor market becomes slack.
Most nations in the world have unstable equilibriums (Islam, Ali & Ahmad, 2011). A shift from the short run to long-run equilibrium is due to economic forces determined by a slight deviation in wages and prices from the equilibrium. For instance, the price decline is induced by an excess supply of product services, or output supply or demand equilibrium is shifted from the market situation when the quantity supplied is unequal to the quantity demanded.
Explain why a system of marketable pollution permits leads to less costly pollution abatement and a higher concentration of polluted areas than a command-and-control system
Pollution permits are approaches that are market-based and that follows a command of control to achieve the task of limiting pollutions through emissions (Brux, 2008). The operations of many markets are affected by externalities and distortions some of which experts believe affects the effective work that a tax-subsidy solution offers. Businesses are allowed to create a fixed amount of pollution. This is achieved through obtaining permits that allow for that. Research studies indicate that better solutions.
Furthermore, equal emissions of the marginal benefits of pollution will be attained when market permits will reach a market-clearing price. It is important to note that the permits can be resold. Today, business markets seek possible solutions that are convenient and less costly. Some of the best ways that they use and that saves them money include reducing pollution emissions through investing in permits or buying them, it is important to note that the levels of pollution can be gradually reduced through tight regulation (Brux, 2008).
Accordingly, reduction of pollution through permits will rise and due to that, only companies that are well established will be able to obtain them at the lowest marginal costs and use them to reduce the levels of pollution. Achievement of a less costly pollution abatement can be through government involvement by controlling the amount of pollution by reducing the number of pollution permits. Besides, the reason for less costly abatement and highly polluted areas is the lack of regulation of the amount of pollution produced as well as lack of legal framework set for trading permits.
Although GDP per capita is the most commonly used measure of a country’s success, many economists believe it does not give an accurate measure of a nation’s economic well-being. Some studies have concluded that that GDP is not the best measure of well-being, and although it may be the best available on a time basis, other factors need to be considered in addition to GDP to give a more accurate picture of economic well-being and the disparity of well-being between nations. Clearly identify at least three such factors that in your view should be included in the GDP calculations. Explain and illustrate how they will help to improve the GDP as a tool for measuring the well-being of a nation
The well being of a nation is far much broader than just the mere calculations involved in the GDP. In calculating the GDP per capita of a country, the total goods and services produced within a given period of time are summed up then divided by the total population. Although this value may be economically impressive in some countries, it does not directly imply that the population is doing pretty well. There are other important factors that need to be considered when computing GDP per capita or even GDP itself (Deutsche Bank Research, 2006).
To begin with, it is definite that over and above economic well being, people cherish happiness a lot. Unfortunately, policymakers do have a succinct measure for happiness and worse still, it is not one of the components when calculating GDP. The real market value of products produced within a country is the only parameter catered for by GDP. Additionally, there are several other elements included in the calculation of GDP such as public consumption, security expenditure, income going to foreigners, and depreciation which do not reflect a measure of a country’s well-being at all.
Overall well being is tentatively reduced by income inequality and unemployment. Hence, the latter two should be inclusive when computing GDP bearing in mind that when a segment of the population is not actively contributing to the economy due to unemployment, their social, economic, and political w ell being will be equally affected. Other elements that should be factored in GDP calculation include state of the environment (such as pollution) education levels, life expectancy as well as health status (Deutsche Bank Research, 2006). The aforementioned factors contribute to well being of individuals although they are usually not included in GDP or GDP per capita calculations.
Baimbridge, M. & Whyman, P. (2003). Economic and monetary union in Europe: theory, evidence, and practice, Cheltenham: Edward Elgar Publishing Limited.
Brux, M.J. (2008). Economic Issues & Policy, Mason: Thomson South Western
Deutsche Bank Research (2006). Measure of well being: There is more to it than GDP. Web.
Islam, M., Ali, R., & Ahmad, Z. (2011). Is Modified Jones Model Effective in Detecting Earnings Management? Evidence from a Developing Economy. International Journal of Economics and Finance, 3(2), 116-125. Web.