Markets and the Economy

Markets and the Economy

Question One

A deficit occurs in a situation where federal authorities spending surpass the actual amount of revenue accrued from taxing exercises. Economists assert that stabilization has a dual relationship in nature such that overspending and surpluses are well able to solve trading issues within a nation. In periods of recession, economic activities tend to reduce thus leading to lower taxes and increased unemployment necessitating workers recompense to moderate the recession effect (Schmidt, et al., 2009). These recompenses largely comprise of unemployment reparations and welfare disbursements accorded towards the sustenance of current consumer spending abilities. As the purchasing power is preserved by the given strategies, the propensity to consume and overall demand functions are stabilized. Note that, the aforementioned actions enhance the federal deficit as spending levels are maintained above the normal level in the recession period.

With a decreased level of taxation, the government has two options for expanding its budget, either through bond trading aimed at transferring consumer power to the federal authorities or the printing of new currency. The latter strategy is less applied as it leads to the creation of inflation within the nation. Note that, as trading activities in recession reduce, business activities like loan applications for investments and extensions tend to decrease due to low demand anticipation, and this often restricts the money supply function (Schmidt, et al., 2009). Loans accorded to business organizations are good examples of deficit budgeting in trading as individuals use the funds to sustain activities that surpass their current spending power. Consequently, as the government resorts to the same practices to redeem the decreased deficit financing evidenced by the consumers, it is able to reinstate the imbalance created by the deepening activity and thereby leading to economic stabilization.

Question Two

            The short-run period within an economy is that marked by rigid prices and wage levels in a manner that leads to constancy despite fluctuations within the economy. In such periods, the inelasticity of both measures leads to high levels of disequilibrium as they inhibit the probable adjustments necessitated to create a new equilibrium in accordance to the nature of the fluctuation. This mode of behavior is termed as ‘stickiness’ and it may result to surpluses or scarcity within the supply functions of the market (Mankiw, 2007). Wages and prices rigidity within the short-run consequently affect the optimization of employment and production levels in an economy. The inverse relationship is noted in the long-run period where prices and wages are non-sticky and thereby responsive to market changes. Consequently, equilibriums are easily achievable as both factors respond to upward and downward movements of the economy, resulting to full employment and optimal production levels.

In the long-run period, labor supply and labor demand curves determine the level of full employment and the real wage. An inelastic supply function is achieved at a constant pricing denoting the optimal production level. With this relationship, the equilibrium point is determined by the long run supply and demand curves, with the production held as constant with price variations in accordance to wage adjustments and revisions in the economy due to business cycles (Mankiw, 2007). Within the short-run periods, enhanced and reduced demand levels lead to outward and inward shifts that would affect both price and production levels. With the rigidity noted in the short run, enhanced demand would lead to high manufacturing levels and pricing necessitating wage and price reductions to pull back the level into the long-run equilibrium state. Inversely, a decline in the demand would lead to a downward shift in terms of manufacturing levels and prices, requiring an upward adjustment in wages and prices to shift into the long-run equilibrium state.

Question Three

            Industrial expansion has infused a substantial challenge to state authorities in terms of pollution management. Two main forms of pollution management approaches are currently used, with the initial one being the command-and-control approach and the second the economic approach. The latter approach is based on emission trading, a strategy applied by government authorities based on the marketing concept that accords economic inducements to manage the consumption patterns of industrial firms and accordingly, the rate of pollution. This is achieved by the issuance of commercial permits, subsidies, pollution fees, amongst others to infuse effectuality within the pollution control practices (Jenkinson, 2000). These instruments shift the social cost of pollution is entirely placed on industrial firms as a recompense towards the emissions recorded in a given period. State authorities as the legal managers of this approach accord a legal limit that is chargeable, with additional high penalties set for agreement breaches.

The effectuality of the given approach with regard to the cost structure is achieved by the fact that the polluters tend to establish their achievable level with regard to their capital bases as this in turn leads to business processes effectuality (Jenkinson, 2000). The command-and control system on the other hand accords the decision process solely to the authorities such that industries are charged with the specific areas that manufacturing activities are to be conducted and the manner of pollutants disposals in accordance with the set environmental directives. The cost structure associated with the process is very high and this has affected the production companies leading to economic incompetence. However, a notable weakness accounted to the economic approach is that, with the pricing being affordable to most industries and the inability to accord control in terms of location, the intensity of polluted areas has been notably elevated.

Question Four

            The first factor to be addressed is the underestimation of economic growth primarily due to the exclusion of the revenues accrued from illegitimate trade activities such as drug peddling, weaponry markets, amongst others, and the non-inclusion of unpaid work within the national GDP figures. These two factors tend to give rise to deflated figures that lead to incorrect reflections and conclusions on the real per capita incomes. Incorporating such in the GDP figures would offer a succinct reflection of the communal and household welfare, and this complements the recommendations accorded for enhanced wellbeing. The second factor concerns the allocation factor (Clasen, 2007). Note that, GDP is computed as a summation of the total production levels accorded to individuals and the domestic levels. The resulting figure is then divided with the present populace leading to the GNP per capita. However, despite the given indicator, it has been noted that the GNP per capita figure in the given situation does not reflect the level of resource allocation as some individuals or areas have more than the acquired figure, while others tend to have less.

Incorporating the allocation measure in the GDP per capita would accord a more pragmatic measure for the societal wellbeing as it aids the affected nation in achieving a higher balance between allocation gaps and ultimately an impartial mode of welfare is achieved. Thirdly, GNP per capita figures employed for comparisons in various nations are amended in terms of a common currency for the purposes of according uniform buying capacity across the nations (Clasen, 2007). The measure accords uniformity in the analysis but it ignores the fact that such regional differences are also evidenced in cases of fluctuations within the exchange rate factors. Therefore, an inclusion of this factor in GDP calculation would work towards correct identification of the inhibitor and consistency in the analysis process.























Clasen, J. (2007). Investigating welfare state change: the ‘dependent variable problem’ in comparative analysis. Northampton, MA: Edward Elgar Publishing.

Jenkinson, T. (2000). Readings in microeconomics. Oxford, UK: Oxford University Press.

Mankiw, N. G. (2007). Principles of economics. Independence, KY: Cengage Learning.

Schmidt, S. W., Mack, C. S., Barbara, A. B., William, E. M., & Ernest, C. (2009). American Government and Politics Today – Texas Edition, 2009-2010. Clifton Park, NY: Cengage Learning.


Still stressed from student homework?
Get quality assistance from academic writers!