1) As we have seen throughout the semester, the government has very important ro

Question

1) As we have seen throughout the semester, the government has very important roles to play in capitalism. Why would it make sense for a government to borrow money to then spend it in a moment of crisis (deficit spending) instead of raising its revenues by raising taxes on individuals? Make sure you explain the relationships between unemployment, aggregate demand,consumption, and the multiplier.   

2) It is sometimes said that capitalists don’t like it when unemployment gets too low. At the same time, it is not good when unemployment is too high… In chapter 17 in the textbook, Bowles et al. detail a tricky balancing act, where profits are maximized at a level of unemployment that is neither too high nor too low.

i. Describe some of the factors that may lead to lower profits when unemployment is too high;

ii. Similarly, describe some of the factors that could lead to lower profits when unemployment is too low.

iii. Finally, explain how this limits the ability of policy-makers to push for full employment and instead may give rise to cycles of rising employment followed by lowering employment.

Explanation / Answer

1. Borrowning money to spend in times of crisis will be a more effectve act as it will stimulate spending and so will have a multiplier effect on the economy. In case raising taxes on individuals to raise government revenue will mean that the disposable income of people will fall and so this will slow down spending and the economy as a whole as consumption falls. Borrowing money to spend will also mean that unemployment will fall and also raising taxes may have the opposite effect on unemployment and aggregate demand as the economy slows. By raising taxes the level of disposable income will fall and also consumption will fall and so the multiplier in the second case will be smaller as compared to the first and so increased spending through borrowing will be a better way to go.

2.i. When unemployment is high there will be lower revenues and lower profits and prices and so this will mean the profits will be low as the prices are low.

ii. When unemployment is too low it could be the case that the economy is not operating efficiently and so there is a lack of resources in the economy to substantially increase profits.

iii Full employment can nevr be reached. As the economy adjusts itself there will be periods of rising and falling unemployment as per the business cycle.

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