Keynes claimed that prices in the economy were “sticky”. It essentially means that the prices charged for certain goods are reluctant to change despite changes in input cost or demand patterns (“Price Stickiness”). Keynes believed the natural increase in demand will not raise the price level or goods and services. Therefore, he argued that the government should intervene by increasing their spending to “prime the pump” of the economy. Governments have many levers to pull when it comes to influencing the direction of the
Although government spending has the potential to stimulate the economy, this essay will explain why the opposite outcome is more likely to result in the short-term. It will be shown, by analyzing the flow of money and the economies of certain countries, that government spending has little economic benefit and does not create new jobs. Nonetheless, in the right circumstances, government spending can prove beneficial to the long-term economic growth of a country. Before the government can spend any money, it must first acquire that money. A government’s two options is either to increase taxes or to redistribute money from within, from one department to another.
America needs to stop being frivolous with its money because spending is not going to help it get out this huge deficit that it has put itself in. The first thing America needs to do is use the impending inflation to its advantage. Usually inflation would be viewed as a bad thing but, this inflation will “raise the prices of a great many commodities, goods and services, among which would be the price of housing” (Mulligan 3). This would be a good thing because it would help mortgages rise which in turn would result in the reduction of foreclosures. Foreclosures are the first sign of economic decline so, a decrease in the amount of foreclosure would demonstrate that a restoration is occurring within the economic turmoil.
Inflation can lead to unemployment, as people demand less due to higher prices and therefore demand for labor maybe decreased. Inflation also creates uncertainty for entrepreneurs, cost curves increase and revenue can decrease thus squeezing profits. Also when inflation is in the mind of the entrepreneur it can escalate easily as they will take inflationary actions like automatically increase prices and therefore it is imperative government spending/borrowing is controlled. Although government borrowing does increase the money supply, the monetarist view of a direct link between money supply and inflation is wrong, as proved when Britain experienced recession under Margaret Thatcher. In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate.
Fiscal deficit can be dangerous to welfare for numerous reasons including, it can lead to wasteful distribution of resources. Numerous studies have found out that there exists a major statistical connection between fiscal deficit and a lot of macroeconomic variables. Increase in fiscal deficit is harmful for the economy. It may cause high price increases, and crowding out of consumption in the long run. This causes poverty to increase and decrease the welfare in the economy.
This ignores the other Social Security crisis¡ªthe fact that the tax burden on today¡¯s workers is extraordinarily high compared to the benefits received (often referred to as the rate-of-return crisis). But even if balancing Social Security¡¯s long-term finances were the only goal, government-controlled investment would be the wrong answer. This is because a government-controlled pension fund would not face the competitive pressure and legal obligation to make investments solely for the economic benefit of future retirees. As one expert has explained: Giving the federal government that power and control would create large risks for the economy and for the retirement security of today¡¯s workers. The Congressional Budget Office, for instance, has warned: For example, evidence at the state and local levels with public employee pension funds¡ªas well as evidence from similar arrangements in other nations¡ªdemonstrates that politicians and their appointees often are tempted to steer the government-controlled pot of money toward special interests, political allies, or corporate contributors.
When the Balanced budget came around, there were a lot of people who protested it. It was thought to not work because if they balanced the budget the economy would slow. The government would have to cut many government funded programs, and this would cause more problems with the budget. The Keynesian spending idea was that the government should be the central role in encouraging different types of economic behavior. When private spending decreased public spending should increase or taxes should be reduced.
In addition Monetarists consider that inflation distorts the working of the price mechanism and is thus a market imperfection preventing the economy reaching full employment equilibrium. So governments will be aiming to achieve economic growth while at the same time controlling inflation at an acceptable level. However, there are other elements to the macroeconomic balancing act which need to be taken
They might put the election winning as the most important issue, which could lead to little attention to price stability such a long-term goal. In order to win an election, central banks controlled by governments are motivated to do anything which may help to decrease unemployment rate even it is possible to allow the genie of inflation out of the bottle. Alesina et al. (1989) believed that there might be a political industry cycle. That is to say, when the election is coming, government is incentives to implement expansionary policies to reduce unemployment and interest rates, but after the election, the adverse consequences of previous policies, such as high inflation and high interest rates, are likely to appear.
Marginal propensity to consume is the idea that that consumers will spend more money if they have more, but increases in income do not lead to equal increases in consumption because people save some of the money. With this increase in aggregate demand, firms will need to produce more in ord... ... middle of paper ... ... in an increased price level if firm’s cannot expand output to meet that demand. If there is no expansion by firms, no additional employees may be hired to reduce the rate of unemployment. Therefore, a significant risk occurs when trying to decrease unemployment in an economy operating at its production possibilities frontier. As an economic advisor to the leadership of Bartvavia, I would not recommend attempting to adopt an expansionist fiscal policy aimed at reducing the already low unemployment.