Why do total leakages and total injections have to be equal?
Injections and leakages have to be equal because the total amount of money/income that is coming into a sector of the economy must be equal to the amount that leaves that sector so that a state of equilibrium can be achieved for the economy to function properly (Baumol & Blinder, 2008, p.125).
Discuss the limitations of national income accounting
The major limitation of national income accounting is that there are various economic activities that are not included in the national income accounting. These activities includes income from prostitution and black market. In addition, another limitation is that it ignores quality of life by focusing on how much money is made in an economy but disregarding the aspect of welfare for the people.
Why does the consumer price index exaggerate the inflation rate?
The CPI is generally the variation in price of selected group or basket of common good and services in a given economy. The major reason why CPI cannot be accurately used to determine the actual rate of inflation is because the whole process by which it is derived is imprecise (McEachern, 2011, p.116). It provide a good estimate for the rate of inflation but it can skew the outcome since it is subject to error, and may therefore over/underestimate the rate of inflation.
Discuss what is, and what is not, included in calculating GDP
During the calculation of a country’s GDP, all the legally sold goods and services are included in the calculation. However, there are some transactions that have proven very difficult to calculate and therefore are not included in the calculating the GDP of a country these transactions includes home production and illegal activities.
Why does investment spending not equal saving in the circular flow?
The reason why investment spending and saving are normally not equal is because the Circular Flow model defines investment spending and savings slightly different from our general notion of both terms. For instance, the model counts any income that a household makes but is not spent on consumer goods as savings, however, the household can use the money they have made to settle of a debt. In the circular flow model expenditures such as paying debts are not considered as investment and therefore can lead to the disparity between the two essentials of the model.
Distinguish between crowding out and crowding in
Crowding out refers to an instance whereby increased public sector spending ultimately replaces or drives down the private sector spending (Baumol & Blinder, 2008, p.132).Therefore, the government is forced to pay for its spending using the borrowed money. On the other hand, crowding in refers to a situation whereby, the governmental deficits’ leads to investment. In this case, government spending actually causes an increase in the demand for goods.
How do automatic stabilizers differ from discretionary fiscal policy tools?
Automatic stabilizers differs from discretional fiscal policy largely because they do not require to be voted by the Congress. Automatic stabilizers normally kicks in automatically depending on the prevailing market conditions. On the other hand, Discretional fiscal policy can only be made by the congress and explicitly through a count of votes.
What problems are associated with the U.S. federal budget process? What solutions have been offered to these problems?
One of the major problem associated with the US federal budget is due to the influence of the two political parties. The practice by the government in spending more than is revenue can support. This has led to staggering federal debts. The main solution that is usually offered is by raising revenue which is achieved through an increase in taxation. (McEachern, 2011, p.93)
Another major problem is the issue the issue that involves a practice by the congress to influence, using powerful federal committees, the allocation of federal money to their states or districts without undergoing adequate vetting. The solution offered is the implementation of various legislative policies prohibiting “earmarks” from being included into the spending bills.
In what ways can fiscal policy affect aggregate supply?
Fiscal policy can affect aggregate supply through government spending. If the government spends more money on investments, the aggregate supply can be ultimately affected. For instance, if the government is spending more money on a research into clean energy, it might therefore cause an increase in the aggregate supply of clean infrastructure (McEachern, 2011, p.164).
It is often said that we are passing our national debt on to our children and grandchildren. Is this true?
If a country spends more than it gains, the resultant is effect is a national debt. Since the US government has over a long period of time borrowed so as to cover up for its budget deficit, if this debt is not paid, or more debts are created, they will be passed down to the next generation who are expected to continue paying for those debts. This is why it is said that the national debt is passed to our children and grandchildren.
References
Baumol, W. J., & Blinder, A. S. (2008). Macroeconomics: Principles and policy. Australia:
Thomson/South-Western.
McEachern, W. A. (2011). Macroeconomics. Mason, Ohio: South-Western.
