The viewpoints of classical and Keynesian economists
Classical economists operate in the laisser-faire economic market concept. This is also referred to as the free market and it is of significance to note that it needs little or even no intervention from the government. Regarding economic decisions, this concept permits individuals to act familiar with their self-interests and it is through this that there is an allocation of economic resources in relevance to desires in the marketplace.
On the other hand, Keynesian economists are dependent on spending together with aggregate demand to describe market economics. Under this concept, there is a belief that aggregate demand is normally affected by private and public decisions. Keynesian economics tends to be the most appropriate for the economy presently as it is based wholly on very simple logic and there exists no divinity thus everything is in control (Colander, 2010).
Why do Keynesian economists believe market forces do not automatically adjust for unemployment and inflation?
Keynesian economists hold the belief that market forces do not automatically adjust for unemployment and inflation because it is about production rather than the capacity of man’s consumption. According to (Colander, 2010), “economists under this concept derive their solutions from applying the aggregate demand level to determine unemployment and inflation levels within an economy” (p. 89). The economists of this school of thought hold the belief that when the government productively uses its money in generating a high return rate, the economy benefits. In addition, proponents of Keynesians economics argue that economic activities in a country will improve if taxes are reduced. In this case, the reduction of the tax rate will subsequently lead to an increase in the development of an economy.
Determinates impacting aggregate demand and supply
Shocks of the aggregate market are variables at the aggregate market equilibrium brought about by variables in the determinants of both aggregate demand and aggregate supply. This is for the reason that aggregate supply representation is through two curves, long run and short run, aggregate market shocks analysis are often assumed for the aggregate market short run and long run. On the side of aggregate demand, “the determinants of the curve shift are the expenditures on consumption, investment, net exports, and government purchases” (Colander, 2010, p. 104). However, on the supply side, the quality and quantity of the available resources form the major determinant, both in the short run and also in the long run (Colander, 2010).
Contractionary and expansionary fiscal policies
Expansionary fiscal policy is a tool used by the government and it results in a money increase either through tax cuts or even increasing the purchasing power of services and goods. This tool is applied to raise total income at times when the economy is perceived to be operating below full employment. In contrast, contractionary fiscal policy is a tool the government uses to decrease money in supply through tax imposition or even reducing the spending power or both.
It is applicable when the economy operates above its potential output. Both policies are effective in the present economy exclusively when the spending of the government surpasses total revenue and there exists a budget deficit. These two policies demand appropriate and timely implementation within an organization to be of advantage and maintain equilibrium failure to which more problems may result in extending to the economy.
Uses of money: How commercial and federal banks create money
Money serves as an exchange medium, unit of exchange, and wealth store. Money is created by commercial banks whenever deposits are loaned out thus they convert their liabilities within the bank into assets towards the person being handed the loan. The federal banks can additionally increase the supply of money by buying bonds. In the United States, monetary policy cannot be considered independent. Even though the federal banks have the liberty to decide on means of attaining their objectives, they lack the liberty to determine these goals as federal law sets them. For equity to prevail in the market, it is paramount that monetary policy remains autonomous. Such parties may also utilize it for their self-interest (Colander, 2010).
Contractionary and expansionary monetary policy
The variance existing between expansionary and contractionary monetary policies are the variations within the economy in regard to the banking system. The objective of the contractionary policy is to reduce money supply thus deal with inflation while one of the expansionary targets to increase money supply thus motivate economic advancements. The intention is making a turn and this means that the greater the monetary demand policy, the more the interest rate is driven down. Fiscal monetary policy is appropriate today as the economy is a party to the full persistence of the economy that went down into recession.
How a government budget deficit affects the economy
Positive aspects of a deficit are experienced when there is deficit spending on occasions of recession. During these recessions, there exist high unemployment rates and low aggregate demand (Colander, 2010). Keynesian economists designate that deficit spending permits a government to provide more job opportunities to an economy and subsequent increase in aggregate demand. On the other hand, negative aspects of deficit include weak currencies, debt stagnation, higher interest rates, and ultimately a lagging economic growth. The best strategy relative to the current situation of the economy is to embrace deficit spending as it pumps liquidity thus creates jobs in the economy.
How foreign exchange rates are determined
The foreign exchange takes place when banks sell and buy foreign currencies in large quantities from other countries. The systems used to determine the exchange rate of currencies mainly include the floating currency system that operates similarly as the supply-demand method. In this case, the market corrects the rate to address inflation and additional economic forces spontaneously. The next system used is the pegged commonly known as a fixed system that is utilized when exchange rates are fixed and artificially retained by a government. When a country has high-interest rates then more investors will buy the currency that increases in demand.
High inflation leads to the decrease of the currency value and finally, high productivity makes the demand to go higher. A strong dollar leads to the higher purchase of foreign goods by the currency thus an advantage to both the consumers and international travelers. A weak dollar leads to less purchase of foreign goods thus imported goods rise in price.
Government budget surplus and the U.S. economy
Government budget surplus leads to decreased tax rates and an increase in beneficiary programs as the government has extra finance to spend. The periods in the recent history in which the U.S. ran budget surpluses include 1998-1999 and 2000-2001:
- 1998 – $69.2B
- 1999 – $125.6B
- 2000 – $236.4B
- 2001 – 127.3B
The reason behind the surplus was the existence of extra revenues from the Social Security trust fund and reduction in short-term interest rates from the Federal Reserve respectively.
Positive and negative aspects of budget deficits and surpluses
In contrast, budget deficit leads to increased tax rates and subsequent reduction of beneficiary programs as the government operates with insufficient funds. This situation in U.S. history can be traced back to the period of the 2 World War when it established itself as a superpower. The deficit was because of the unprecedented accumulation of debts and upscale of defense spending.
Potential consequences of a country having a large overall debt
The potential dangers faced by countries with huge overall debts lead to a downgrade of government debts that bring about alarm within the financial markets. It could also drain a country’s confidence in addition to broadening bond yield spreads. This makes countries fear collaborating with the victim country in situations of trade. For a long-lasting solution, I would implement worldwide governance to inhibit countries from operating excessive current account imbalances (Colander, 2010).
It is always a country that imports goods that get benefits from a tariff while it is the country that exports goods that lose, as they have to be charged a fee that is included in the total costs.
Money supply, interest rates, and the economy when the Federal Reserve is a net seller or buyer of government bonds
Where the Federal reserve is a net seller of government bonds the money in supply increases and interest rates fall. Where it is a buyer the money in supply reduces and interest rates increase. A government implements a stimulus program in the economy to increase purchasing power by increasing the amount of money in the supply.
Rank the factors that contribute to the discount interest rate
- Inflation: Inflation reduces the value of the dollar and thus affecting both the return on investments and purchasing power.
- Monetary: This is based on monetary goals and thus the monetary committee sets interest rates.
- Investment risk: where the risk of investment increases, investors will be expectant of compensation for the risk and thus they prefer choosing risky as compared to less risky investments
Who benefits and loses from a tariff or quota
There exist numerous types of tariffs related to importation and exportation and they have the objective of protecting consumers and domestic employment as imported goods increase competition thus threatening domestic industries. It is of significance to note that domestic markets benefit from protectionist trade policies, as there is a limitation of competition from imported goods. Developing industries are also provided with security while the national economic security is too protected. The fees received as a result are taken as government revenue and decreased domestic competition is likely to increase the Gross Domestic Product.
How domestic markets benefit from protectionist trade policies
The main importance of trade tariffs or quotas is to protect domestic producers and jobs. The main losers in this are foreign producers and importers. Domestic markets benefit from the protectionist policy because their price of domestically produced goods is cheaper than imports that have high prices due to tariffs. Tariffs and quotas generate revenue for the government. Tariffs are a form of tax on imports and this directly goes to the government. Quotas on the other hand are a benefit to the government as the protected corporations employ more.
The effect of a trade surplus and deficit
Trade surplus brings forth a channel of money getting into the country. A trade deficit results in a channel of money getting out of the country. Within organizations trade, surplus leads to high living standards as extra supplies are received creating enough for everyone while trade deficit leads to bad debts thus low living standards are the end result as there is a deficiency and not everybody is content (Colander, 2010).
The significance of trade agreements
Trade agreements are contracts that are enforceable by law and at the same time law binding. Trade agreements are very significant to the way a country responds and operate when interacting in terms of the exchange of goods and services. Initially, they enhance accountability and transparency as the parties involved are obligated to fulfill their promises and make sure they deliver on their considerations.
They also enhance commitment as failure may lead to monetary damages that are expensive in the end. International trade has provided the U.S. with a diverse market and job opportunities consequently raising the standards of living compared to a small industrial or developing nation where such opportunities seem to be limited and scarce. Generally, a country that takes part in international trade always experiences development in all spheres. The developments may take the form of infrastructure and international relations that in turn lead to better living standards.
Reference
Colander, D. C. (2010). Macroeconomics (8th ed.). Boston: McGraw-Hill.