Question

Discussion of Short-Run Economic Fluctuations --- Possible Discussion Topics --- Others are Welcome

What have been the major sources of disruption over the past several years?

From an Aggregate Demand and Supply perspective, does it matter which programs are adopted? Which programs do you recommend should be adopted?

Should subsidies and tax breaks to business (corporate welfare to agriculture, forestry, export promotion, research and development, removal of dividends tax etc. ) be the focus or should subsidies go to individuals (subsidies to education, social security, unemployment insurance, aid to families with dependent children, Medicare etc.) ?

How will the programs proposed affect future growth possibilities for the economy (how will they effect the PPF and long run aggregate supply)?

How will the programs affect the debt? How will they affect private investment? Is crowding out a concern in the short versus long run as a result of the proposed policies?

How will the different proposals affect the income distribution? How will they effect consumer confidence and spending?

Answer 1

1.

Major sources of disruption in the economy are as follows:

A. Deregulation, pervasive investments based upon the speculation and lack of proactive approach from the regulatory bodies as was the case for 2008 financial crisis.

B. Lack of corporate governance and prevailing unethical practices such as the case of Enron, Arthur Anderson and world.com

C. Global outsourcing of manufacturing jobs and services to the countries of low cost labor causing increase in unemployment

D. Prevalence of illegal immigration that has disturbed the labor demand and supply balance.

2.

Yes, it is important that which program is selected. In the economy, it is the demand that creates supply. So, these programs should be implemented first, that increases the aggregate demand. Once it is created, it will be required to be met by the adequate aggregate supply and it will go on to increase by opting for the investment spending. By this time, programs that promote supply should be applied to encourage the firms.

So, increase in government spending and or reduction in tax is should take place to stimulate the demand. While doing this, monetary policy to reduce the interest rate or making funds available for the disbursement, should take place. It will increase the supply to cater the demand.

3.

Subsidies should be given to the businesses as a stimulant and individuals should be given the jobs so that they spend. It will create demand and firms will also be encouraged to stat production activities so that more jobs are created. Besides, social security and unemployment benefits are given, but these benefits fall under the category of transfer payment and act as stabilizers. Though, these stabilizers may be slow to respond and or don’t work as expected. So, discretionary fiscal policy is required in the form of government spending or tax breaks to the individuals.

4.

The programs will not only create the demand, but also it will create the capabilities and capacity enhancement to increase the supply. As a result, long run aggregate supply will increase and the curve will shift to the right. Besides, the PPF curve will expand in an outward direction as capacity of the economy has increased and government spending will increase the demand that will be met by the supply. Subsidies to the higher education and training programs, will create superior human capital and technological development will take place. All these progresses will help the PPF to expand and economy will grow.

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