Macro Economics Essay
Classical economists remote the idea of two fundamental suggestions. The first is that wages equal the value that would be lost if employment were to diminish by one. The second is that unemployment changes in two categories. The first is defined as frictional unemployment. Frictional unemployment can be mainly explained by reasons based on inconsistent information. First, businesses intermittently try and balance their resources and with miscalculation and changes in demand they will increase or decrease the amount of employees they have.
Also, people in-between Jobs may not have enough information to find and select the right Job. A classical economist would also describe voluntary unemployment. This type of unemployment occurs with the refusal or inability of workers to find Jobs, due to legislation, social practices, collective bargaining or intransigence. Another issue that is presented with classical macroeconomic theory is that wages are sticky. To explain this it must be understood that there are two calculations of wages.
The first is simple, Just the actual wage you receive in dollars from an employer. The second is based on the value of the wage compared to the price of goods. Classics believe that unemployment would increase f wages were to be lowered, both
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Professor Piggy’s Theory of Unemployment describes several ways that employment can be increased. One is better organization. The second is an increase in wages, which increases the attractiveness to Jobs, and cancels voluntary unemployment. Lastly, an increase in efficiency would increase employment. This would create more products and profits, increasing the need and ability of businesses to hire workers. Due to the fact that both of the types of unemployment that classical economists advocate, our representative in the argument would believe that employment tends to be full.
With this in mind he would not support intervention of the government with policies that try and change the unemployment rate. He would state that the unemployment rate would level itself out after frictional and voluntary unemployment settle. Classical economists would also proclaim that any intervention with government policy would create inflation and disturb the free markets. The follower of John Keynes and Keynesian economics would describe an additional form of unemployment.
Defined Macro Economics By Raymondville unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wages both the aggregate supply of labor willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. ” He would support the fact that inflation and unemployment create an inverse function. If inflation is higher then unemployment is lower, if inflation is lower, or there is a deflationary gap then unemployment is higher.
This means that Keynesian believe unemployment comes when “total leakages exceed injections” in the economy (Levi, 68). In order for unemployment to occur savings must overreach investment or taxes overreach government spending, or potentially both (Levi, 69). Normally, if savings exceeds investment interests rates will wane until we reach an equilibrium interest rate. Keynesian would attest to the idea that savings plans change based on “animal spirits”. Keynes introduced this idea cause businessmen have no way of knowing how their investments will profit over time.
If they don’t have any factual data they must be going off of their instincts or “animal sprits”. Therefore, if savings exceeds investments enough then interest rates are going to become so low that they cannot get any lower, and the economy is in a liquidity trap. Based on Keynesian economic theory, a liquidity trap prevents monetary policy from being effective in decreasing unemployment. The solution then to unemployment in the case of a liquidity trap is fiscal policy. Either the government must increase spending or decrease taxes.
Another Keynesian principle that accounts for unemployment is the idea that wages are rigid. The Keynesian economist would argue that if wages were versatile then unemployment could be corrected. Due to the idea that wages are rigid, the unemployed are not ready to accept wages lower than a certain amount, even if these wages are above the Job’s worth. Just like all economic supply and demand curves, excess supply should cause the price to be brought down until it equaled demand. If wages are sticky then this cannot occur, leaving the surplus of workers. The Keynes follower would give the following remedy to unemployment.
He would suggest government spending or a decrease in taxes, or fiscal policy. Fiscal policy would still have an effect during a liquidity trap by increasing people’s marginal propensity to spend. Keynes also stated that inflation could reduce the real value of wages, therefore decreasing employment. This is because the real value of wages can change without the actual value changing. Therefore this economist would believe that an increase in the money supply, which promotes inflation, would lower the unemployment rate by decreasing the real value of wages. The Fed should simply increase the money supply at the same rate that the full employment economy grows, and the government should desist from any stabilizing urges. ” What school of thought would make this suggestion, and how do economists of that school Justify that prescription? At the same rate that the full employment economy grows, and the government should desist from any stabilizing urges. Monetarists believe in an economic idea called the search-theory of unemployment. They believe that there is a natural rate of unemployment for any difference in inflation and wage rises.
People are naturally going to leave, or be forced to leave Jobs. This rate is going to be determined by ages and inflation. People need to get higher wages in order to pay for the increase in goods and services due to inflation. According to monetarists “unemployment rises when the rate of inflation begins to drop” (Levi, 65). This is because inflation will not provide the expected increase in wages that people are looking for. This will increase the time that it takes to find a Job with a higher wage. In conclusion, monetarists believe that the Fed should find a rate of inflation that puts employment at full.
Then the Fed should continue to increase the money supply to account for this inflation rate. This will create a natural rate of employment where people accept Jobs at the same rate normal rate. The steady rate of inflation will limit the search of Jobs. This means that the structural unemployment level is at the lowest rate. Houston. Charles H. “John Maynard Keynes: A Personal Biography of the Man Who Revolutionized Capitalism and the Way We Live. ” Macmillan Publishing Company New York Copyright 1984. Levi, Maurice. “Economics Deciphered: A Layman’s Survival Guide” Basic Books, Inc. , publishers. New York. 981. Pages. 65-70, 137 Grumman, Paul. “Peddling Prosperity’ W. W. Norton & Company. New York. 1994 Whelan, Charles. “naked economics: undressing the dismal science” W. W. Norton & company. New York. 2002. Pages. 76-77. Testing procedures required by the US Food and Drug Administration raise the cost and price of drugs. Should we eliminate such requirements in order to ease inflationary pressures? How about the regulation of hot dog content? Just like many government agencies the US Food and Drug Administration does a very important, somewhat under recognized Job, which raises the price consumers have to pay. The FDA is responsible for protecting the public health by assuring the fatty, efficacy, and security of human and veterinary drugs, biological products, medical devices, our nation’s food supply, cosmetics, and products that emit radiation. ” Along with protecting the public health comes extra cost. The etc. , adds to the cost that consumers pay for these goods. The FDA is also a government agency in the Department of Health and Human Services. This means that all of the employee’s paychecks and costs of the FDA are paid for with tax money.
The big debate in economics, like many economic debates, is whether the cost of the FDA is worth the benefit, as well as if the benefit of easing inflationary pressures is Roth the cost of losing a level of safety in our products. The benefits of the work of the FDA are inexhaustible. The FDA is split into eight different centers. The Center for Biologic Evaluation and Research makes sure that biological products are safe for human use and are readily available to those who need them. The Center for Devices and Radiological Health regulates all medical devices sold in the United States as well as all, medical and none, that emit radiation.
The Center for Drug Evaluation and Research makes sure that all drugs, including over-the-counter, prescription, and even toothpaste and shampoos are safe and available to those who use and need them. Other centers regulate food, tobacco products, and veterinary drugs and equipment. There are several costs, mainly financial that the FDA presents. The FDA is a government agency so all of the costs, wages, insurance for employees, and infrastructure to run the agency is paid for with American tax dollars. This is, I hope, a cost that every American is willing to pay to ensure the safety of their foods and drugs.
Another crucial point that can be made about the costs of the FDA is that their regulatory laws increase the costs of the goods they are trying to make safer for nonusers. An appreciable example would be the regulation of the meat industry after the publication of Upton Sinclair book The Jungle. People had no idea what they were eating and how it was processed. Some would argue, what people don’t know can’t hurt them, but in this case it could. After the Meat Inspection Act and Pure Foods and Drugs Act, the industries had to change the way they did business.
The newly created standards increased the cost of production, in turn increasing the cost of products on the shelves. This occurs with many if not all products that must meet the standards created by the FDA. The last area that needs to be discussed before determining a viewpoint on the subject is the pros and cons of inflation. If we leave inflation to run its course then goods in the short and long term become higher prices. With inflation though, its not only goods that are increasing in price, wages are increasing proportionally.
So in the long run inflation does not really matter, because an increase in the money supply changes the value of the dollar across the board. The important aspect of inflation is that the rate of inflation can cause serious problems if too high. When inflation occurs peoples demand for money decreases. This is because money loses value if you hold on to it. This motivates people to quickly turn over their cash for goods because they don’t know how long the money will be worth its current value. One way to ease inflationary pressures is to decrease regulation. This decreases the standards that products and businesses are under.
They will have to meet less rigorous bars and therefore do not need to put as much time, effort, and money into making sure that they meet them. This will decrease production costs and decrease the cost that consumers pay for products. If prices in general are increasing due to effect of inflation. The debate of whether these requirements are necessary can almost be defined by political standpoints. The regulation of foods and drugs is the same as any regulation in business. Should the government intervene or not? I think there is something to be said about the intervention of government in business.
In this case, the government regulation of these businesses is the only way they would be regulated. A private company could not do what the government does with regulation, because of the power the government holds to make and enforce laws. Another question that should be posed is whether or not decreasing regulation old have that much of an effect on prices. Maybe initially the inflation rate would be offset by decreased production costs caused by decreased regulation. In the long run, prices are going up and it’s a vicious circle that the Fed and government have to be determined to stop.
Offsetting prices for a little while cannot do that much good. Eventually we will have higher prices and our goods will have been deregulated, making them more hazardous. Again, the question posed is should we eliminate such requirements in order to ease inflationary pressures? No. The additional costs of making products safer for nonusers are necessary and worthwhile. I don’t believe that any person would regret the implemented standards on the meat industry in 1906, except maybe the owners of the meat factories. People should be aware of or have the ability to be aware of the ingredients in and hazards of the products they are using.
Eliminating the costs of an increase in inflationary pressures by reducing FDA requirements is not worth the potential health risks posed to consumers and would not even ease inflationary pressures substantially. What policies (monetary, fiscal or a combination of these) would you recommend for he current state of the U. S. Economy? If I were going to initiate an economic policy plan for any economy I believe that it would follow free market tradition, but in our current economic predicament I would suggest the following fiscal policy.
Although, I believe people should be allowed to conduct business themselves with the least amount of government intervention, government intervention I think is the only policy that is going to get us out of the current slump. The fiscal policy plan should be to decrease government spending and decrease taxes. This way the people decide where to spend their money and the economy comes more efficient. Businesses that are necessary and wanted survive and others flounder and go out of business.
Currently the government is using tax money, using loans and printing money to pay for the huge government projects, bailouts and stimulus packages. This increases inflation and increases the risk of the United States defaulting on our loans from other countries. This puts us in a sticky situation that we should never have even come close to. The government should Just support necessary and beneficial plans. This way the people can pay for efficient and much Taxpayers will have more money in their pockets. This will increase their marginal propensity to spend. A decrease in taxes is almost like a natural stimulus plan.
I think that what the government has already done needs to be accounted for when determining what needs to be done. The government has given out billions in subsidies to banks. Due to low interest rates the banks aren’t lending out money. Prices are continuing to go down and people want to get loans but it is nearly impossible because banks require high down payments and perfect credit scores. Today because of the recent credit crisis almost everyone’s credit has gone out the endow. Credit card companies were trying to raise everyone’s interest rates by changing payments dates and other schemes.
Now people’s credit scores are down, banks don’t want to lend and people can’t buy all the surplus property and homes. The only people that can buy right now are people with cash, and because most people don’t hold on to large quantities of cash properties are not being bought. This lowers prices even more, increasing demand. This demand cannot be fed because of the lack of loans being given. I think that the government should, instead of using all of our tax money to beside banks the money should go directly to people with good, not perfect, credit rates that have a low risk of defaulting on the loan.
This will increasing spending, soak up the surplus of homes, which will increase value causing a decrease in deflation and potentially a steady rate of inflation. The inflation and money circulation caused by an increase in spending will decrease unemployment. The economy will start going again and we can go back to our long-term steady rate of inflation. To supply side economists, the key to any economic stabilization is managing aggregate supply. What kinds of policy do they advocate, and what outcomes do they expect to achieve?
Supply-side economics is based on the idea that the objective of economic policy is national output, but without input you can’t have output. In order to increase the standard of living in a society you must increase the national output. And all anyone really wants is to have a higher standard of living. The numbers in the long run don’t matter as long as everyone is happy with the way they are living. So what must you do in order to increase output, you must increase input and supply. Economic policy can be geared to creating a greater supply.
Supply-ciders, as they are called, would create a government policy that increases supply in several ways. First, they would support the creation of tax credits for investing. This would increase the incentives of businessmen to put their money into projects. Second, they would instill patent protection to promote the invention of goods. People are going to invent things, only when they are going to benefit from their production. If goods and ideas can be stolen, copied and sold at a lower price, then all the inventors’ hard work is to reimbursed.
This makes inventing not as attractive. If ideas and goods can be government would issue tax breaks for exploring to promote the finding of natural resources. All of these things would result in higher incentives. These incentives would promote an increase in investment and input that would in turn increase output and the standard of living. When people know that their hard earned money is going to be taken away, even if it is to the government for very important and beneficial projects, they are going to work less. Therefore they give less of their money away.
If taxes are lowered then people will work harder knowing that they get to keep their additional earnings. The increase in income that arises from this actually pays for the decrease in tax rates to the government, because a less percentage of a higher income can potentially be more. This is the idea behind supply-side economics. Although, this type of economics is very important a large supply-side economic policy is somewhat ineffective in an economy such as the United States. This is because tax rates are already low in America. Therefore a decrease in taxes is not covered by an increase in motivation to earn more.