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Macroeconomics and Trade Policys - Article Example

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"Macroeconomics and Trade Policy" paper argues that capital outflow due to expansion of credit facilities balances the demand for dollars from net exports of goods. This altogether begs for quantitative rather than a qualitative analysis in the magnitude of the change in the trade balance of the US. …
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Macroeconomics and Trade Policys
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Download file to see previous pages Keynes argued that prices and wages do not determine the level of employment, as many classical economists suggested, but instead the level of aggregate demand for goods and services (Case & Fair 683). Keynes realized as well during the Great Depression that the government could intervene in the economy to attain specific employment and output goals by either increasing or decreasing taxes and government spending.

For example, raising taxes will decrease the disposable income of households and thus effectively decreasing consumption. When the government decreases consumption, the household demand for goods and services decreases thus it would only seem reasonable that the amount of output that the economy would also decrease and with this the number of people employed to produce these goods and services. This is precisely why Keynes argued that it is neither prices nor wages that determine the level of employment, but instead the aggregate demand. This kind of fiscal policy hence is a contractionary policy because it actually lowers down both employment and output growth. While according to Mankiw’s principles, there is an inverse relationship between employment and inflation thus a contractionary policy would lead to a fall in the inflation rate of the economy.
Monetary theorists converge with Keynesian theorists in the belief that a central authority should be able to affect aggregates such as aggregate demand. For example, by increasing the money supply and effectively shifting the aggregate demand curve to the right, demand for goods and services in the market also increases, leading to an increase in both aggregate output and price levels (Case & Fair 684). From this, it can already be seen that while output rises thus increasing the employment in the economy, increasing the money supply also spurs inflation rates to go up. With this, it only seems fair to give credit to Keynesian theorists and Monetary theorists for giving birth to what we call macroeconomics today. ...Download file to see next pagesRead More
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