Markets and Economy


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Question 1

Increased federal budget deficit from a recession can actually help stabilize an economy. According to McEachern (2008), during a recessionary period, employment levels as well as taxes register a decline. It is at around this time that an increase in government spending avails to individuals welfare payments as well as unemployment compensation. This is what goes a long way to enhance the budget deficit as the expenditure and revenue changes are effected. However, at the same time, the expenditure changes go a long way to avert an imminent decrease in households disposable income and in such a case, consumption is maintained or enhanced. This according to McConnell (2007) is what leads to an aggregate demand level maintenance hence ensuring recession effects are softer. Here, it may also be important to note that at times, a federal budget surplus (as opposed to the federal budget deficit discussed above) can go a long way towards stabilizing the economy especially during periods of inflation.

Question 2

An understanding of the short run as well as the long run equilibrium in economics is of great significance and this is more so when it comes to adjustment in not only process but wages as well. It is important to note that in some cases, the adjustment of prices as well as wages might not be quick enough to enhance markets equilibrium. When a price level change occurs, the aggregate quantity of goods as well as services availed to the market for sale also changes. This can indeed be brought out in a clear way by checking out aggregate supply curve movements (the movements in this case are along the curve).

Arnold (2008) is also of the opinion that a number of other factors can contribute towards the shifting of the aggregate supply curve (short run). These factors include but are not in any way limited to natural resource price increase including those of oil or gold. Such a price increase ceteris paribas increases the production costs and informs a decrease in the aggregates supply in the short run. The reverse is true.

According to McEachern (2008), when it comes to wages, employment at its natural level is maintained when there is an adjustment of real wages in such a way that the quantity of labor supplied is equal to the labor quantity demanded. It is at this level that an economy can be said to have achieved its output potential level. McConnell (2007) notes that in the long run, other than the short run, there is an assumption that prices as well as ages are largely flexible and this is what triggers the tendency of the real GDP to shift to the potential.

Question 3

A system of marketable pollution permits leads to a less costly pollution abatement as well as a higher concentration of polluted areas than a command-and-control system.  This is indeed a fact that has been verified in Singapore where there is an active trading of ozone-depleting substances through an auction mechanism. When it comes to the enhancement of a less costly pollution abatement, it is important to note that polluters are empowered to place permit bids that gives them the ability to come up with an amount of pollution that is largely fixed. What is more, resale of the permits is allowed. It can be noted that when it comes to command and control system, it is easier for the government to reduce the aggregate emissions in regard to pollution simply by bringing down the total number of issued pollution permits. This is what essentially makes command and control system lead top lower concentration of polluted areas as compared to the system of marketable pollution permits.

However, the system of marketable pollution permits do not compare with the command and control system when it comes to the enhancement of less costly pollution abetment as a result of the ability of the latter to be resold. For instance, suppose we have two companies, A and B, and it happens that the pollution emissions marginal benefit of A is higher than that of B; it shall follow that such a company would be more inclined towards buying another business’s permits whose pollution emission marginal benefit happens to be lower.

Question 4

In my opinion, GDP is a fairly effective measure of a country’s well being though it cannot be used in isolation and hence to improve its reliability, there is an existing need to incorporate other factors so as to get a more accurate image of the economic well being of a country. This is also true when it comes to making comparisons in regard to the economic performance of different countries. Three factors which in my opinion ought to be included in the GDP computations so as to come up with a more accurate image of a country’s economic well being include but are not in any way limited to standards of living, real income as well as income growth inequality.

According to Arnold (2008), GDP cannot purport to be a measure of an economy’s standards of living. It however remains to be just an indicator of the standards of living in a given economy rather than a substantive measure. As it is, standards of living in a given country can be used as pointers of the well being of the nation in question and hence a consideration of the same could be appropriate. Some of the standards of living measures include but are not limited to educational standards, quality healthcare access as well as the real income per individual.

Income growth inequality is essential the differences existing between wealth and income and with that in mind, it goes ahead to incorporate economic assets as well as income distribution disparities. The importance of this as a measure of the economic well being of a county is based on the fact that a nation cannot be aid to be well balanced if there exists high income gaps as well as wealth disparities among st people in the society.

Lastly, we have real income. Real income comprises of individuals income which has already been adjusted for inflation. It can be computed by essentially deducting from the nominal income, the inflation figure. Real income according to Weasels (2006)is an accurate measure of well being as it basically seeks to chart the aggregate goods and services that income can buy. It hence follows that nations with a lower real income will essentially be considered to have lower levels of well being as compared to nations registering higher levels of real income.


Wassels, W. (2006). Economics. Barron’s Educational Series

Arnold, R.A. (2008). Economics. Cengage Learning

McConnell, C. R (2007). Economics: principles, problems, and policies. McGraw-Hill Irwin

McEachern W. A. (2008). Economics: A Contemporary Introduction. Cengage Learning

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