Explain the main arguments in favor of economic stabilizatio

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

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?

Solution

1.Explain the main arguments in favor of economic stabilization during recessions

ans: Fluctations during economic recession and booms are very costly. Recessions in particular are wastage of resources.Since people and machines are idle when they could be producing goods and services.Stabilisation policies can help to eliminate this wastage of resources.

2. Explain why policy lags could make stabilization policies counterproductive.

ans:As the textbook explains , it takes time to recognise an economic problem , to take actions and for that to have its effect on the economy.By the time a policy is enacted and takes effect , the economy may have already recovered . So policy will end up being destabilizing , it may actually result in larger economic fluctations

3. 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?

ans: The roles of the government in the market economy is to protect the public. They oversee themarket economy.They create strict rules to reduce negative externalities. Yet it’s the supply anddemand that run the economy, so it’s best for the government not to intervene. They need to regulate and create a system to make sure laws and regulations are followed. Higher tax rates is another role of the government to protect low income families.The justifications given in favor of more government involvement in the market economy ispreventing recession, reduce negative externalities, and justification on taxes (redistribution of income). Also allows more public goods to be produced.

The reasons given in favor of less government involvement in the market economy is because ofless freedom. People will believe the government is not looking out in the best interest of aperson and taking their rights away. Forcing them to do something they refuse to do. It can causeeven more problems with price ceiling and price flooring.