MARKETS AND THE ECONOMY

Markets and the Economy

Abstract

In this study we try to explore the concept of “Markets and the Economy” in a holistic context. The main focus of the research is on “Markets” and its relation with “Economy”. The research also analyzes many aspects of “Markets and the Economy” and tries to gauge its effect on “Economy”. Finally the research describes various factors which are responsible for “Markets and the Economy” and tries to describe the overall effect of “Markets and the Economy” on “Economy”.

Markets and the Economy

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

The economics of budget deficits are somewhat different in wartime and peacetime. Consider wartime. Wars tend to absorb outsized amounts of an economy's resources. Rather than relying solely on taxes to acquire resources, national governments often resort to borrowing. The alternative is to increase taxes. Because the wartime generation sacrifices the use of resources, while future generations presumably benefit from the wartime effort, it has been argued that borrowing to finance wars is equitable. By the same token, it has been argued that debt finance of a war is an efficient investment if it makes citizens in current and future generations better off than they otherwise would be (Baumol & Blinder, 2008).

The economics of peacetime deficits are more complicated. First, the effects of deficits appear to depend on the specific types of expenditures the deficits support. Second, the effects of deficits appear to depend on the way household saving responds to deficits. Third, the impact deficits have depends on where the economy is located in the business cycle when the deficit is incurred.

However, deficits may not have such dire effects and, Robert Barro (1974) argues, may not matter at all. Barro argues that deficits (implicit or explicit) do not affect national saving, capital investment, or the future standard of living. This will be true if private savers respond to the deficits by saving more, thereby offsetting the deficit's negative effect on national saving (Baumol & Blinder, 2008). Private savers might increase saving, if they foresee the negative effect the deficit otherwise could have on future living standards, and if they are determined to prevent deficits from undermining their children's futures. In opposition to this idea, B. Douglas Bernheim (1987) argues that deficits reduce national saving if the amount that households can borrow is restricted by financial markets. In this case, deficit-financed tax cuts provide these households with funds they would like to borrow from markets, but cannot. These households treat deficit-financed tax cuts as they would borrow funds, and spend them, reducing private saving and national saving.

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

By the early 1950s, Keynes's theory was widely seen as valid by most professional economists (especially among academics). Economists accepting the validity of the Keynesian short-run theory of output determination became known as Keynesians. Their published work focused on how fiscal policy could ...