Markets & Economy Essay

1142 WordsMay 27, 20125 Pages
Assignment # 2 – Markets and the Economy 1. Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy. Increasing the federal budget deficit can actually help to stabilize the economy. At the start of a recession an economy will reduce taxes along with lowered income and increased unemployment. With that in mind, the government will spend more to pay unemployment compensation and welfare. These changes in government spending then raise the deficit. Since the money spent is put back into many households, this can actually help stabilize, or at least lessen their debt. Government spending in this manner can essentially assist in reviving the economy. Once citizens are able to maintain their disposable income, they can begin to spend more money within their community. This puts capital back into the economy and the recession will eventually be repaired. 2. Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium. Adjustments in wages and prices take the economy from the short run equilibrium to the long run equilibrium. This can be a slow process. As wages and prices increase, it shifts the short run aggregate supply curve upward as costs of inputs wise within the economy. (O’Sullivan, 2010) During these time periods, wages and prices do not respond to economic changes in the short run. When there are sticky prices, or prices resistant to change, we see shortages or surpluses. When prices and wages are sticky, it can prevent the economy from a natural level of operation. During a low level of employment or potential output, unemployment exceeds the natural rate which also lowers costs (O’Sullivan, 2010). 3. Explain why a system of marketable pollution permits leads to less costly pollution abatement and a higher concentration of

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