Macroeconomic Policy

Macroeconomic Policy

Explain the main arguments in favor of economic stabilization during recessions. Explain why policy lags could make stabilization policies counterproductive.

Economic fluctuations are costly, and they include recessions and booms. When the economy experiences a recession, it wastes a lot of resources since individual and other factors of production in such a situation are idle. Therefore, the use of stabilization will help to eliminate the waste of resources.

It takes time for the policy makers to identify an economic problem, take action and have that action affect the economy. Therefore, by the time a policy is legislated and takes effect, the economy would have already recovered. The policy may lead to larger economic fluctuations because of being destabilizing.

What are the justifications given in favor of more government involvement in the market economy? What are the reasons given in favor of less government involvement in the market economy?

The justification in favor of more government involvement in market economy includes redistribution of income through taxes, preventing recession and allows production of more public goods. Also, it includes reducing negative externalities (Ippolito, 2012). The reasons in favor of less government involvement in market economy include less freedom. Individuals believe that the government is taking away their rights by not considering their interest. Therefore, people think that they are being forced to do or follow things that they do not like.  Less government involvement can also create more problems such as price flooring and price ceiling.

Should the government always balance its budget? If you think it should, what steps do you suggest that it should take to balance its budget?

The government should balance its budget by using the following steps. First, the president will submit a detailed budget request for the next financial year. Second, the Congress will hold hearings to question Administration officials about the requests and then develop its budget resolution. Third, the Congress will enact budget legislation. It entails considering the annual appropriation bills that are needed to fund discretionary programs in the next financial year. Also, it includes legislations to pass changes to mandatory spending or revenue received.

What is the relationship between budget deficits and national (public) debt? Why has the USA national debt been increasing for decades?

Government debt represents deficit accumulated over a given period. Therefore, government’s debt rises when the government has a deficit, and it will fall when the government runs a surplus. The national debt has been increasing for decades because the government has also been increasing its spending at a rate higher than the growth of revenue (Ippolito, 2012). The government increased spending on national defense, social security programs, Medicare, and Medicaid.



Ippolito, D. S. (2012). Deficits, debt, and the new politics of tax policy. Cambridge: Cambridge University Press.



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