ECONOMICS

Economics

Economics

Increased Federal Budget

If the government cut taxes or increase their transfer payments such as, unemployment insurance, welfare payments, and food stamps this will partly offset the fall in the household income. When other households incomes are falling pays less in taxes which partly offsets their decline in their household income. Also, when the government cuts corporate taxes; it helps to prevent businesses from cutting spending as much as they would during the recession. Therefore, an increased federal budget deficit can help stabilize an economy because when households disposable income rises they will spend more on consumption. I think when consumption rises it raises the aggregate demand.

When the public debt is falling, the Treasury can reduce the amount it borrows each year to refinance the portion of the debt that comes due that year (the government bonds that have matured). When the Treasury borrows less, it indirectly increases the amount of money that can be used to finance private investment, instead. The act of borrowing less is equivalent to providing new funds for private investment, or what is the same thing, equivalent to an increase in the supply of savings to the private sector (Blanchard, 2003).

A recession occur when the GDP growth slows, business stop growing, unemployment rise, employment falls, and housing prices decline. Although the above-mentioned things sound really bad, there is one good thing that comes out of a recession: It cures inflation. What does that have to do with stabilizing the economy? In order to prevent inflation, the Federal Reserve must try to slow the economy without contributing to the recession. To do this, it involves the government lowering taxes, spending on social programs, and generally ignoring the deficit itself. While the deficit grows, government spending increases as citizens are given unemployment compensation and other transfers such as welfare payments and food stamps. And although the change in revenue and expenditure works to increase the deficit, they simultaneously work to mitigate the decrease in disposable household income of U.S. citizens (Mankiw, 2002). Consumption and spending is at a rate above normal, helping to maintain the level of aggregate demand; thereby, lessening the effect of the recession. While individual employment and income increase, government spending falls as fewer individuals require and receive unemployment compensation and other transfer payments.

Adjustments in Wages And Prices

During the short-run prices and wages do not respond to changes in the economy. Prices are slow to adjust (sticky prices) when this happens it creates periods of shortage or surplus. When wages and prices are sticky it prevents the economy from operating at it natural level or employment and potential output. Before the short-run equilibrium connects to the long-run equilibrium the economy usually goes through an influction; like now we are in a recession so the supply curve is sloped down the unemployment rate is high wages are low This is when the economy is at a level output that exceeds potential output, there will be more competition for labor and more raw materials; this is when prices ...