Intro to Economics
A country's balance e of payments is commonly defined as the transactions record between its residents and foreign residents over a specified period. Each transaction recorded in accordance is according to the principles of double-entry bookkeeping, meaning that the amount involved is entered on each of the two sides of the balance-of-payments accounts (McConnell& Brue, 2007).
1. Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy.
The financing expenditures exceeding the revenues of tax by the government results in the deficit spending. When the spending of the government exceeds the revenue of the government, the result is the budget deficit. When the government pays for the money by borrowing, the result is the deficit spending. Deficit spending can be financed in the same year by: When the government borrows funds to finance a budget deficit the result is deficit spending (McConnell& Brue, 2007). The government borrows funds by issuing U.S. Treasury bonds (IOUs). Individuals, banks, corporations, other government agencies, and foreigners purchase the bonds because they are the assets. Between the years 1969 and 1998, the federal budget: The U.S. government has not always been in deficit. Throughout history it has had years in which the budget was in surplus and other years in which it was in deficit. For 28 years, from 1969 to 1998, the government did experience budget deficits. However, in 1998 the government ran a budget surplus.
Automatic stabilizers tend to stabilize the level of economic activity because they are spending and revenue items that respond automatically and counter cyclically to the business cycle. Most uncontrollables are automatic stabilizers. They help to stabilize the economy. During a recession, national income decreases. More people are unemployed and qualify for unemployment benefits. These benefits increase national income and help to reduce the recessionary gap. During inflation, progressive income taxes decrease national income to some extent and help to reduce the inflationary gap (McConnell& Brue, 2007).
Crowding out is defined as a decrease in private sector borrowing and spending because of increased government borrowing. When the government borrows money to finance a deficit it issues bonds. If the private sector buys the bonds, this may mean less credit is available to finance consumption and investment. The result may be a decrease in private sector spending (Sherman et al, 2008).
A budget surplus is an excess of government revenues over government expenditures. This means the government collects more in taxes than it spends. In terms of the circular flow model, dollars leak out of the circular flow as taxes, but they are not injected back in as government spending. The result is an added leakage. Internal debt refers to U.S. government debt or Treasury bonds held by U.S. citizens, businesses, and other institutions. When the bonds come due there is interest that must be paid. The government uses money from taxpayers to pay the interest. The result is a redistribution of dollars from those who pay taxes to those who hold bonds.
External debt is U.S. government debt (U.S. Treasury bonds) held by foreigners. When the bonds are sold to foreigners this allows us to get more public-sector goods without giving up private-sector goods. However, when the bonds come due foreigners will use the dollars to buy U.S. goods and services. The debt is the accumulation of several years’ deficits. To pay off all the debt the government would have to receive more in tax revenue than it spent, possibly for several years. During this time bonds would be paid with tax dollars as they came due. This would create a redistribution or transfer of dollars from taxpayers to bondholders.
2. Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium.
There are two types of equilibria that one comes to know in macroeconomics. The first is known as the long run equilibria where as the other one is known as the short run equilibria.
The Long Run Equilibria
The long run equilibria refer to the occurrence of the natural level of employment where the real wage adjusts so that the quantity of labor demanded equals the quantity of labor supplied (Sherman et al, 2008). The overlap of long- run aggregate supply and the aggregate demand influences its long-run equilibrium. When the economy achieves its natural level of employment, it achieves its potential level of output. The real GDP eventually moves to potential, because all wages and prices are assumed to be flexible in the long run. In order to put macroeconomic house of a nation in order, the long run is implemented. By making use of the long run phenomenon, the level of price is stabilized whereas structural and fractional unemployment remain. The adjustment of the real wage occurs when the demanded quantity of labor meets the supplied quantity of labor. The achievement of the natural level of employment by the economy paves its way for the potential level of its output. Since all wages and prices are assumed to be flexible in the long run therefore one can see that real GDP eventually moving to potential.
The Short Run Equilibria
Contrastingly the short run equilibria are all about stickiness of the wage or price that happens to be the obstacle to the full adjustment. The question that comes to mind is that why there is occurrence of deviations in the potential level of output in macro economy along with the probable implications to be discussed with short-run macroeconomic equilibrium.
3. 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.
According to the belief of some economists, the solution of the tax subsidy rarely works effectively and without distortions to the way a market operates to the externalities. They consider that the mechanism of free market provides a person with more effective answer. The combination of market-based approaches to the task of limiting pollution emissions and command and control are known as pollution permits. Polluters can call for a license that appropriates them to pollute in a limited manner. The gradual decrease of the can only be achievable upon the will of the government officials.
4. 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 timely 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.
In order to find out and assess the economic well being of a country, GDP is utilized. It is also the estimate used to measure up to standards of living in various countries besides being the measurement pulsation of a country. Of course, to use GDP as an indicator of overall economic performance, we must convert nominal GDP to real GDP, since nominal values can rise or fall simply as a result of changes in the price level.
Consequently, the sums of the two sides of the complete balance-of payments accounts should always be the same, and in this sense the balance of payments always balances.