Question

Identify one of the business cycle theories that were discussed in class. Highlight four important points about your selected theory. Does this theory sufficiently describe why business cycles occur? Why or why not? Explain your answer.

What is fiscal policy? Who are the parties involved in creating fiscal policy in the U.S. economy? What are the two general types of fiscal policy? What 2 tools are used to implement fiscal policy? When are the two general types of fiscal policy used according to economic theory? Be specific in your answer.

What is the size of the U.S. public debt? Who owns the U.S. public debt? What impact does the U.S. public debt have on the budget of the U.S. federal government? Be specific in your answer.

What is the debt to GDP ratio for the U.S. public debt for 2018? Is the U.S. national debt beneficial or detrimental to the U.S. economy? Provide and explain three reasons to support your answer. Be specific.

Answer 1

The Keynes’ Theory of Business Cycles

?Keynes theory was developed in 1930s, which was the period when whole world was going through great depression. This theory is the reply of Keynes to classical economists.

1. In his theory of business cycles, Keynes advocated that the total demand helps in the determination of various economic factors, such as income, employment, and output. The total demand refers to the demand of consumer and capital goods
2. In such a case, total investment and expenditure on products and services is more, the level of production would increase. When the level of production increases, it results in the increase of employment opportunities and income level. However, if the total demand is low, the level of production would also be less.
3. Consequently, the income, output and investment would also be low. Therefore, changes in income and output level are produced by changes in total demand. The total demand is further affected by changes in the demand of investment, which depends on the rate of interest and expected rate of profit.

4. Keynes referred expected rate of profit as the marginal efficiency of capital. Expected rate of profit is the difference between the expected revenue generated by the capital employed and the cost incurred to employ that capital.In case, the expected rate of profit is greater than the current rate of interest, then the investors would invest more. On the other hand, the marginal efficiency of capital is determined by expected return from capital goods and cost involved in the replacement of capital goods.

yes, Keynes theorly sufficiently describes why business cycles occur. It describes, with increase in entrepreneurial expectations the marginal efficiency of capital increases. Hence entrepreneuers make huge investments which explained upward turning points. The multiplier start its action, bringing an increase in income , which is much higher than increase in investment, this is multiplier effect which explains the Expansion phase in a business cycle. Abundance of capital goods reduces marginal efficiency of capital, which discourages further investment. This explains the downward turning point or reverse action of multiplier of a business cycle.

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy.

In the United States, fiscal policy is directed by the executive and legislative branches. In the executive branch, the two most influential offices belong to the president and the Treasury secretary, although contemporary presidents often rely on a council of economic advisers. The U.S. Congress passes laws and appropriates spending for any fiscal policy measures. This involves participation, deliberation and approval from both the House of Representatives and the Senate.

There are two main types of fiscal policy: expansionary and contractionary.

The first tool is taxation. That includes income, capital gains from investments, property, and sales.The second tool is government spending.That includes subsidies, transfer payments including welfare programs, public works projects, and government salaries.

Expansionary Fiscal Policy : When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/or lower taxes. A recession results in a recessionary gap meaning that aggregate demand (ie, GDP) is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services).

Contractionary Fiscal Policy : Contractionary fiscal policy is essentially the opposite of expansionary fiscal policy. When an economy is in a state where growth is at a rate that is getting out of control (causing inflation and asset bubbles), contractionary fiscal policy can be used to rein it in to a more sustainable level.

Total Federal Government Debt in 2018. At the end of FY 2018 the gross US federal government debt is estimated to be $21.48 trillion, according to the FY19 Federal Budget.

The debt falls into two broad categories: Intragovernmental Holdings and Debt Held by the Public. U.S Debt Debt Held by the Public is owned by Foreign, Federal Reserve, Mutual funds, State and local government, including their pension funds, Private pension funds, Banks, Insurance companies, U.S. savings bonds, Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors). Intragovernmental Holdings owned by Social Security, Office of Personnel Management Retirement, Military Retirement Fund, Medicare (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund), All other retirement funds, Cash on hand to fund federal government operations.

Political disagreements about the impact of national debt and methods of debt reduction have historically led to many gridlocks in Congress and delays in budget proposal, approval and appropriation. This is most dramatically seen in disputes about raising the U.S. federal debt ceiling – the legislative limit on total federal debt accumulation. The debt ceiling is a limitation in name only, as it has traditionally been raised, suspended or simply ignored whenever fiscal reality encroaches upon the debt ceiling threshold.Despite the many purported limitations on the national debt and legally required deadlines for the budget, the budget process operates largely based on the schedule and whims of current lawmakers.

The United States recorded a government debt equivalent to 108 percent of the country's Gross Domestic Product in 2018.

U.S. national debt is detrimental to the U.S. economy in the long run. In the short run, the economy and voters benefit from deficit spending. It drives economic growth. The federal government pays for defense equipment, health care and building construction. It contracts with private firms who then hire new employees. They spend their government-subsidized wages on gasoline, groceries and new clothes. That boosts the economy. The same effect occurs with the employees the federal government hires directly. But over the long term, a growing federal debt is like driving with the emergency brake on. As the debt-to-GDP ratio increases, debt holders could demand larger interest payments. They want compensation for an increasing risk they won't be repaid. Diminished demand for U.S. Treasurys would further increase interest rates. That would slow the economy.