MARKETS AND THE ECONOMY Assignment Example | Topics and Well Written Essays - 1500 words

MARKETS AND THE ECONOMY - Assignment ExampleThe factors explaining the append in budget deficit stabilizers ar outlined below 1) As the economy goes into ceding back, corporate pay decrease leading to lower corporate tax revenues for the political relation. Due to lower beg in the economy, companies betray less(prenominal) and have higher cost pressures leading to lower profitability. 2) As corporate profit decrease, companies go about firing employees leading to an increase in unemployment in the economy. This further leads to lower income tax revenues for the government. 3) As unemployment increases, the government has to make more payments for unemployment benefits and other welfare programs (transfer payments). These three factors automatically increase the government deficit during recession due to lower revenues and higher spending built into the system. 4) In order to spur demand in the economy, government can spend higher than usual. This spending could be through low ering taxes and/or sort magnitude spending on new/existing projects. All the four factors combined mean that some of the core group of recession on households and companies is mitigated by government spending. Unemployed workers get state benefits and companies get opportunities to arrange in new projects. The combined effect is that companies are encouraged to hire more workers to work on those projects thus reducing unemployment and people have more disposable income due to reduced taxes thus change magnitude consumption. Therefore, the increase in budget deficit during a recession helps stabilize the economy by transport it back to the equilibrium operating level. Adjustments in final payment and scathes take the economy from the short-term equilibrium to the long run equilibrium The price system and wages in the economy do not always change instantaneously. Changes in macro-economic factors like output, demand, supply, interest rates etc do not immediately bring about a change in price levels and wages. Thus, when one or more of the other macro-economic variables changes in the economy, prices and wages are slow to react to this change, therefore the economy comes to operate in a short-run equilibrium where prices and wages are yet to adjust to the other macroeconomic changes. Some of the reasons for this stickiness of prices and wages include contracts for fixed distance like labor union contract for wages fixed for a year, or even foodstuff competition prohibiting firms from increasing prices suddenly. However, as time goes (in the long-run), wages contracts get re-negotiated depending on earlier changes in demand and supply, inflation, and other factors. This change in wages leads to change in cost structure of firms and price changes thence become necessary. For example, if the labor union re-negotiates to higher wages, the firm must increase its prices in order exsert the increased cost of labor. As these adjustments in wages and prices ta ke place, the movements of wages and prices determines the output of the economy. For example, if the firms find it less profitable to produce more, the will reduce their output and the GDP will contract and vice versa. Thus, adjustments in wages and prices take the economy from short-run equilibrium to long-run equilibrium. This is to say that if the prices and wages had changed immediately hobby a change in the other macroeconomic factors, the long-run equilibrium output would have been seen in the short-run. However, as prices and wages are sticky and adjust to the changes slowly, the economy first settles on a short-run equilibrium where other factors have changed but prices and wages have not and eventually the adjustments in price and wages takes the economy from t