Ethel's Chocolate Lounges

Ronda Neal

Principles of Economics

Professor Steven Major

Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy.

Budget deficit is the amount by which government spending exceeds revenues in a given year.

Way to spend more than it collect’s is to borrow the money. A government bond is a method of borrowing from the public. The government is to repaid loan plus interest.

A recession is six consecutive months of declining Gross domestic product (GDP). Without action, an economy may experience a depression. Deficit spending increase could offset a decrease in household income. There are three type of spending help stabilize an economy.

Bonds increase transfer payments. Unemployment insurance, food stamps and welfare payments increase the income of some households. Increase payments offset the fall of some household income. When decrease in household income happens, fewer taxes are paid.

Consumption spending will not fall as much. Corporations will experience the same type of circumstances. A gain like income will decrease in a recession. Taxes will also decrease . The need to cut spending will also decrease.

The federal government can use increase budget deficit spending to reduce the negative effect of a recession. This could save a awful position with the economy. If the deficit is restricted in size and duration, it is a good tool to stabilize an economy.

Describe how adjustment in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium.

Wages and prices will adjust for different reasons. A boom means the firm can produce at levels over the long-run potential. Unemployment will be very low. The firm’s make decisions to hire and keep workers will be a challenge. This will cause firms to increase both wages and prices. The short-run aggregate supply curve will continue to shift upwards as long as wages and prices increase.

Firms producing below the...