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Markets and the Economy - Admission/Application Essay Example

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The world financial market is in great turmoil today, as shown by the wild fluctuations in the major stock markets during the past few weeks. There is a lot happening today that can be confusing to some people and this paper tries to explain the reasons behind these major events. …
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Markets and the Economy
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Markets and the Economy

Download file to see previous pages... The following paragraphs take a close look at the connections between economic actions and the results it bring to ordinary citizens; these try to help explain the reasons behind them too.
Federal Budget Deficits – the recession that started sometime in 2007 still has lingering effects on the economy even now. The current administration of President Barack Obama has the worst of it, much of the problems with the deficit and debt being merely inherited and yet it gets blamed for these continuing fiscal and financial problems. Many people see these twin problems for their negative effects on the nation's economy by depriving people of their employment that had also reduced consumer confidence to their lowest levels in recent memory. The deficit in the nation's budget is seen as purely a negative event, caused by profligacy and ill-advised policies. However, deficit spending can also help stabilize the economy and here's how that happens.
Deficit spending by the Federal government is the money being spent that is over that of any expected revenues (a negative budget); this type of fiscal policy is designed to counteract all the negative effects of a shortfall in the aggregate economic demand. This is where government can do its part of stimulating the economy whenever the private sector fails the duties of leading the economy by increasing overall demand. The approach using deficit spending had been used to a marked effect before, during the Great Depression of the 1930s. When Big Business failed during those turbulent times, the government stepped in by providing a needed shot in the arm to the economy by undertaking massive public infrastructure projects. A failure of capitalism allows the government to take up the slack by its deficit spending. It is vital the Fed does not monetize these deficits; otherwise, it can lead to inflation because the tendency is to make the interest rates rise if deficits are large and persistent (Baumol & Blinder, 2011, p. 712). However, there must be a distinction between having a large budget deficit and having an intentional deficit spending policy. The first situation can lead to a deterioration in government's finances over the long term; while the second event (deficit spending) should only be temporary. Persistent budget deficits had led to the credit rating downgrade recently and has serious negative consequences. The country cannot just continually borrow money forever and keep spending the money it does not have. On the other hand, deficit spending is a temporary measure designed to revive the economy when it falls into a slump or recession. The New Deal economic programs of Franklin Delano Roosevelt were intended to achieve the three Rs, namely: relief for the millions of jobless people, revive the economy and reforms (political, social and financial). The financial stimulus package of Pres. Obama was designed almost the same way with the same objectives. Adjustments in Prices and Wages – market equilibrium (balance) is achieved whenever the demand and supply forces are equal to each other. The tendency is to maintain this balance unless external forces disrupt it. In classical ...Download file to see next pagesRead More
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