Markets and Economy

Markets and Economy



Question 1

Degree of integrated economic stability depends on the specific values ??of cyclic budget deficits, which act as automatic "shock absorbers" oscillations in aggregate demand. It is called an automatic reduction (increase) in tax revenues and increase (decrease) in government transfers in the background of a cyclical downturn (upturn) in business activity.

In the phase of cyclical upswing aggregate income increases, and therefore tax revenues grow automatically, and transfer payments are automatically reduced. As a result, increasing cyclical budget surplus and inflationary boom relatively restrained. In the phase of a cyclical downturn gross income is reduced, and therefore the taxes automatically fall, the transfers are increasing. As a result, increases cyclic deficit against a background of relative growth of aggregate demand and size of production, the relatively limited depth of the recession.

Even if all government expenditures simply represented as a constant, independent of the dynamics of current income, the degree of integrated economic stability is higher, the higher the level of tax rates.

At the same time it should be noted that increasing the degree of integrated economic stability contradicts the other, more long-term goal of fiscal policy - the strengthening of incentives to increase the supply of factors of production and growth of economic potential. But this reduction is accompanied by a decrease in magnitudes cyclical budget deficits and surpluses, and hence lowering the degree of integrated economic stability

Because resources are underutilized during recessions, many macroeconomists argue that the government can and should be more proactive than simply permitting recessionary deficits. They argue that the government should purposely increase deficits during economic contractions, and that doing so would increase aggregate demand, thereby reducing the severity of contractions. In this case, policy makers would resist cyclical contractions by legislating larger expenditures and lower taxes. This is called activist counter-cyclical fiscal policy. Such policy has a potential to be efficient, if it does not short-circuit the economy's self-correcting mechanisms and if the government balances its budget over the business cycle (Harvey, 2005).

Question 2

In macroeconomics, we seek out to comprehend two types of equilibrium, one parallel to the short run and the other related to the long run. The short run in macroeconomic study is a period in which wages and some other prices do not respond to changes in economic conditions. In certain markets, as economic conditions vary, prices (including wages) may not adjust fast enough to preserve equilibrium in these markets. A sticky price is a price that is slow to adjust to its equilibrium level, creating sustained periods of scarcity or surplus. Wage and price stickiness prevent the economy from achieving its natural level of employment and its potential output. In contrast, the long run in macroeconomic analysis is a period in which wages and prices are flexible. In the long run, employment will move to its natural level and real GDP to potential.

In a perfectly competitive equilibrium, if all people and all occupations were exactly the same, no difference in ...