INCREASED FEDERAL BUDGET

Increased Federal Budget

Increased Federal Budget

Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy

According to the Government Accountability Office, and the Office of Management and Budget states that without changes acquired policies, federal deficits and debt will grow in coming decades to unprecedented level that would threaten and damage the economy. Policymakers should tolerate large deficits over the next several years to maintain strong aggregate demand until the economy is back on its feet. The boost in deficits for several years pales in comparison to the size of the economy over the long run. As the economy recovers, policymakers will require to illustrate to the public and the lenders who finance borrowing needs that they are prepared to move the budget toward a sustainable long-run path. One example that would help get the economy back on sounder feet is President Obama's initial budget proposal and the health restructure packages; it represents the first step in the direction of putting the federal budget back on track. This is only a small step; much still needs to be finished to address the full scope of the long-term allowance problem (Bassetto, 2006).

Budget deficits and surpluses can assist to stabilize the economy. If the economy goes into a recession taxes will drop as income and employment fall. At the same time, government spending will boost as people are granted unemployment compensation and other transfers for example welfare payments. Such automatic changes in revenue and expenditures work to boost the deficit. At the same time, they furthermore work to mitigate the decline in disposable income that households are experiencing. This maintains consumption at a higher level than would otherwise be the case. This assists to maintain the level of aggregate demand and thereby weaken the effects of recession.

If the economy is in an expansion and experiencing inflation, a budget surplus works to stabilize the economy. In this instance taxes boost in response to the increase in employment and income. At the same time, government expenditures drop as less individuals receive unemployment compensation and other transfer payments. These changes work to lower the level of consumption and therefore the level of aggregate demand. Thus, the surplus works to stabilize the economy throughout inflationary periods.

On the overhead grounds, it is possible to contend that an annually balanced budget may really work to destabilize the economy. In particular, such a requirement may work to worsen recessions and inflations. In the case of recession, we have currently glimpsed that revenue falls while expenditures increase thereby creating a deficit. In order to balance the budget, government should raise more revenue (by increasing taxes) and slash expenditures. Both of these actions will lower disposable income. As a result, consumption and aggregate demand will fall. As aggregate demand falls, the recession worsens (Blanchard, 2003).

Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium

The long-run puts a nation's microeconomic house in order; only frictional and structural unemployment ...