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Markets and the Economy - Essay Example

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Markets and the Economy

Similarly, there is less corporate income tax revenue. The loss of jobs will cause the government to invest in programs such as unemployment insurance. The government spending does rise in an effort to provide for its citizens during tough times. The government spending rises due to the increased use of available programs and the formulation of new programs to help the citizens. According to Cashell, this increase in government spending and the additional spending that is due the additional programs created the economy then grows at a faster rate enabling a stable economy to be achieved (2005). This increase in government expenditure is usually during a time that the government has no matching rise in tax receipts. It is possible for the economy to rise by more than the initial increase in government spending. This form of government spending does have a multiplier effect (Cashell, 2005). Describe how adjustment in prices and the wages transform the economy from the short run equilibrium to the long run equilibrium? In the long run equilibrium, the economic growth is dependent on three factors the growth in labour force, amount of capital available to the work force, and the rate of technological advance. If we consider, an economy where the aggregate demand is due to an increase in spending, Cashell observes that this demand can be satisfied by either raising the prices or increasing real production. If the economy is operating at a full employment, and the stock is at a full capacity then an increase in demand is met by an increase in the prices of available goods and services. Cashell states that, for a fully employed economy, an increased government spending does yield an increase in the nominal GDP (2005). Let us consider wage. This forms a main element of cost in the economy of any country. A higher wage rate does translate into a higher cost this means a less profit will be incurred at any given price. A squeezed profit for any company means a cut back on production. A wage increase in any economy would mean a decrease in the quantity of goods and services supplied at a constant price. During a recession, the economy is at short run equilibrium. In such an environment, it is difficult for the wages to be increased; however, this can be counteracted by a fall in prices, and thus the recessional gap can be seen as shrinking. This led the economy to equilibrium at full employment. Cashell concludes that if wages and prices fall unusually slowly then it is possible for the economy to endure a prolonged period of production below potential GDP (2005). Explain why a system of Marketable pollution leads to less costly pollution abatement and a higher concentration of polluted areas than a command and control system. The use of the marketable pollution system is cost effective when compared to the command and control approach. The command and control approach demands that all drivers have a pollution permit and be able to track the amount of pollution he or she emitted. In addition to this condition, the command, and control system requires that lead be eliminated from gasoline and all vehicles have catalytic converters. These conditions all are in an effort to reduce air pollution from cars. However, it is in the use of marketable pollut ...Show more

Summary

Assignment #2 Markets & the Economy Name: Institution: Explain how an increased federal budget deficit resulting from a recession can help stabilize an economy? Budget deficits are one way to determine the state of the economy of a given government. In some cases, it is possible for a given economy to have massive deficits yet the economy is doing well…
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