Assignment.
Can you please help me to answer these 5 questions?
1. 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.
2. 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.
3. Economists debate whether discretionary fiscal policy is an effective way to control and stimulate the economy. Present 2 arguments in favor of the view that fiscal policy is effective and 2 arguments that fiscal policy is ineffective or destructive to the economy. Be specific.
4. 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.
5. 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?
Why do business cycles keep on happening? Why is there a business cycle?
Four possible theoretical answers include:
1. Keynesian Business Cycle Theory
- Recessions are the result of decreased aggregate (total) demand.
- As aggregate demand falls, businesses lose revenue and have to adjust their production operations (including with labor). This may result in unemployment.
- Falling aggregate demand may also result in business failure or slowdowns (including in entrepreneurship).
- Economic recovery may require government intervention or stimulus (fiscal policy and monetary policy).
2. Austrian Business Cycle Theory
- Artificially low interest rates (or new credit created by a central bank like the Federal Reserve) may create an increase in loans and economic investment by businesses.
- Creates an economic boom/expansion: business expansion/creation, increased entrepreneurship, job creation...
- Malinvestment occurs: some of the economic investment is unsustainable!
- Some businesses and business ventures begin to fail. Contraction of overall business activity. Unemployment... Abandoned/surplus capital goods and business projects. Back in a recession.
3. Monetarist Business Cycle Theory
- Changes in the money supply cause the business cycle. Note that a central bank has significant ability to influence the size of a national money supply.
- Quantity Theory of Money: size of a national money supply x velocity of money = price level x quantity of goods and services produced/consumed in a national economy (real GDP)
- Stabilize the money supply and stabilize the economy and minimize business cycles
4. Real Business Cycle Theory
- Changes in real world events cause the business cycle.
- Some of these supply shocks and demand shocks include bad weather, changes in regulations and laws, innovation, changes in technology, changes in productivity, population changes, changes in international agreements, political changes, and so forth.
- Governments have limited ability to influence the causes of these events, so governments have limited ability to influence business cycles.