7. .COURSE NAME: MANAGERIAL ECONOMICS
Please follow the instructions in the document.
Course name, topic name, question and instructions were posted individually in the document.
1.one main topic above 400 words and 3 referencesbelow discussion
2. Two replies each 250 words.(my classmate replies are posted in the document.)
3. APA format
4. Assignment must needed as per instructions, as mentioned in attached document.(Must follow the highlighted instructions in the document which is indicating to complete the discussion.)
Please ping me if there is any question/confusion. Must follow instructions.
Thanks
Lesson 7 Discussion Forum
Discussion assignments will be graded based upon the criteria and rubric specified in the Syllabus.
For this Discussion Question, complete the following.
Question
Read the first 13 pages of the attached paper which discusses the effect of government intervention on recessions.
Instructions:
1. Locate one journal article for each of your two chosen economic types. You need to focus on the Abstract, Introduction, Results, and Conclusion. For our purposes, you are not expected to fully understand the Data and Methodology.
2. Summarize these journal articles. Please use your own words. No copy-and-paste. Cite your sources.
3. During the second week of the Module, you will need to reply to the posts of two of your peers. Your replies must focus on increasing knowledge of the class and must advance the discussion further. Simply affirming your peers does not count as a substantive reply.
4.Please post (in APA format) your article citation.
5. Please provide 3 references under the discussion.
6. Please post replies to 2 of my classmates each 250 words and their discussions are provided below.
Supplemental Resources: – Material Read first 13 pages
Classmate post 1
byAdithya Narayanan-Monday, 14 September 2020, 9:29 AM
Number of replies: 0
Effects of Government
Abstract
Recession is a time or period when the whole countrys economic value falls and everybody will be a crisis for goods and resources. The prices will be more due to fewer products and people will start losing their jobs as the company will not have sufficient money to pay their workers and employees. The prices of everything will be increases due to recession but unemployment makes the situation of people so worse that they cant buy anything. The GDP rate will fall. Only the people who kept fixed deposits in the bank and invested money on real estate and stocks will be benefited.
Introduction
The government should intervene and must help the public by distributing money to them and organizations for proper functioning and a stable economy. The government should provide food grains and minimum requirements to the poor people who cannot afford it during the recession. The government should think of all possible ways to reduce unemployment. During the recession, the government should provide free health services in public hospitals. There are chances of rich and middle-class people bringing up disputes if the government will not help them and they will think the government is showing inequality (German-Soto & Brock, 2020).
To pay salaries the companies have to increase the prices of the products which will ultimately affect everyone again. The government should also provide free transportation facility to the people which are also a huge budget for the government to provide everything for free. The schools and colleges will increase the fees and with this, the students will face difficulty and many will stop their education for not being able to pay the fees. There will be many dropouts and this is will cause huge damage to the students career (Horwitz, 2012).
Results and Conclusion
To stable the economic level the government should not let the cost of products increase as it will cause difficulty for the public to purchase. The banks should provide loans to the needy and help the small businesses so that they dont get affected. During the recession also, the companies should not stop hiring the workers and not fire any workers. The companies should stabilize their situation by taking loans or selling any assets (MAIA & et, 2019).
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Classmate post2:
byMounika Poonati-Wednesday, 23 September 2020, 11:44 AM
Number of replies: 0
Liang, M. I. N. (2010). Government Intervention, Debt Finance, and Firm Value in the Recession Period: An Empirical Research on Listed Companies [J].Finance and Trade Research,2.
One of the economics concerns is the extent of government intervention in the economy. In the free markets, economists suggest government intervention should be limited as it causes the insufficient allocation of resources. Consequently, other economists argue in support of government intervention in distinct fields, such as externalities and monopoly power, Liang (2010). In a recession, there is a continuous deficiency in the aggregate demand pushing the economy to new levels of unemployment and reduced outputs.
Government intervention will ensure increased private sector spending to boost the economy out of recession. Consequently, stimulating the personal sector growth will relatively reduce government spending and increase revenues through taxations to facilitate faster growth of the economy. Ideally, instead of using monetary and fiscal policies to exchange private sector spending, the government establishes an economic stimulus in direct spending to cut taxes and lower interest rates. Moreover, this will influence private sectors in the economy to be active in economic growth. Government intervention affects personal sector consumption and investment spending.
During recessions, private sectors experience a fall in investment and spending, which leads to lower economic growth, Liang (2010). When the government reduces spending simultaneously, there is a possibility of a massive fall in economic development and a collapse in confidence. Regarding deep recessions, the government borrows from the private sector and uses the funds to employ dull resources. Consequently, failure in the money supply attributes to the Central Bank or government to print money. Further, the government needs to prevent the explosion of credit and economic boom through positively influencing fiscal and monetary policies. Monetary policies will encourage financial stability through incentives and grants. During a recession, the government increases spending and reduces taxes to expand economic growth.
Tucker, A. (2011). Government Intervention in Clean Energy Technology during the Recession.Tex. Envtl. LJ,42, 347.
The prevailing economic conditions are an indication of a global recession since financial markets are crumbling. The gross national product in most states has reduced, the unemployment rate is high, and large financial institutions face nationalization. Consequently, government spending on merit and public goods during a recession can create excess inefficiency and bureaucracy, Tucker (2011). Government spending on available goods will influence the aggregate demand of the public. Ideally, government parastatals are limited to any revenue incentive, which explains the mismanagement. On the other hand, the privatization of state-owned industries leads to substantial efficiency savings.
State-owned industries are managed with politicians who lack the market discipline in maximizing the limited resources. Most of the companies are prone to mismanagement. Further, government intervention on the economy cases more challenges than solutions. For example, the government can support the longevity and survival of inefficient firms in the economy. In instances where the government offers incentives to banks to avoid bankruptcy, it creates an ethical threat where banks will expect handouts from the government. Moreover, economists suggest that the best government intervention makes little difference to the duration of the recession, Tucker (2011). Instead, it creates more challengesfor instance, the accumulation of public sector debt.
Government intervention is essential in maintaining economic growth and stability. In regards, State protection is vital to safeguarding property rights and national spending. The state spending should focus on encouraging investments rather than consumption. Consequently, the expenditure on the national government should eliminate wasteful and unnecessary spending. In a recession, governments should aim to improve economic performance for future expectations. In boosting the level of demand, the economy adjusts to long term productivity. Government strategic policies will influence the longevity of the economic recession.
References
Governmental
Intervention in RecessionsURL____Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path.pdf
Munich Personal RePEc Archive
Should a Government Fiscally Intervene
in a Recession and, If So, How?
Harashima, Taiji
2 April 2017
Online at https://mpra.ub.uni-muenchen.de/78053/
MPRA Paper No. 78053, posted 31 Mar 2017 09:03 UTC
Should a Government Fiscally Intervene in a Recession and, If So, How?
Taiji HARASHIMA*
April, 2017
Abstract
The validity of discretionary fiscal policy in a recession will differ according to the cause and
mechanism of recession. In this paper, discretionary fiscal policy in a recession caused by a
fundamental shock that changes the steady state downwards is examined. In such a recession,
households need to discontinuously increase consumption to a point on the saddle path to
maintain Pareto efficiency. However, they will not jump consumption in this manner and
instead will choose a Nash equilibrium of a Pareto inefficient path because they dislike
unsmooth and discontinuous consumption and behave strategically. The paper concludes that
increasing government consumption until demand meets the present level of production and
maintaining this fiscal policy for a long period is the best option. Consequent government debts
can be sustainable even if they become extremely large.
JEL Classification code: E20, E32, E62, H20, H30, H63
Keywords: Discretionary Fiscal policy; Recession; Government consumption; Government
debts; Pareto inefficiency; Time preference
*Correspondence: Taiji HARASHIMA, Kanazawa Seiryo University, 10-1 Goshomachi-Ushi,
Kanazawa-shi, Ishikawa, 920-8620, Japan.
Email: [emailprotected] or [emailprotected]
1
1 INTRODUCTION
Discretionary fiscal policy has been studied from many perspectives since the era of Keynes
(e.g., Keynes, 1936; Kopcke et al., 2006; Chari et al., 2009; Farmer, 2009; Alesina, 2012;
Benhabib et al., 2014). An important issue is whether a government should intervene fiscally in
a recession, and if so, how. The answer will differ according to the cause and mechanism of
recession. Particularly, it will be different depending on whether disequilibrium is generated.
The concept of disequilibrium is, however, controversial and therefore arguments continue even
now about the use of discretionary fiscal policy in a recession. In this paper, the concept of
disequilibrium is not used, but instead the concept of a Nash equilibrium of a Pareto inefficient
path is used.
Recessions are generated by various shocks (e.g., Rebelo, 2005; Blanchard, 2009;
Ireland, 2011; Schmitt-Groh and Uribe, 2012; McGrattan and Prescott, 2014; Hall, 2016).
Some fundamental shocks will change the steady state, and if the steady state is changed
downwards (i.e., to lower levels of production and consumption), households must change the
consumption path to one that diminishes gradually to the posterior steady state. Therefore,
growth rates become negative; that is, a recession begins. However, the explanation of the
mechanism of this type of recession is not perfect because an important question still needs to
be answered. If households discontinuously increase (jump up) their consumption from the
prior steady state to a point on the posterior saddle path and then gradually move to the posterior
steady state, Pareto efficiency is held and thereby unemployment rates do not rise. Therefore,
even in a serious and large-scale recession, unemployment does not increase. This is a very
unnatural outcome of a serious recession.
Harashima (2004, 2009, 2013a) showed a mechanism by which households do not
jump up their consumption even if the steady state is changed downward because they are
intrinsically risk averse and non-cooperative and want to smooth consumption. The
consumption jump does not give them the highest expected utility; that is, unsmooth and
discontinuous consumption is not optimal for households. Hence, instead of choosing the
posterior saddle path, they will choose a Nash equilibrium of a Pareto inefficient path as the
optimal consumption path. Because of its Pareto inefficiency, unemployment rates will increase
sharply and stay high during a recession. This paper examines whether discretionary fiscal
policy is necessary, and if it is necessary, how it should be implemented when an economy is in
a recession and proceeding on such a Pareto inefficient path.
Fundamental shocks that change the steady state basically mean shocks on deep
parameters. A representative fundamental shock, an upward shock on the rate of time preference
(RTP), is examined in this paper. Faced with this shock, a government has three options: (1) do
not intervene, (2) increase government consumption, and (3) cut taxes. The consequences of
these options are examined and the outcomes are evaluated to determine which is the best
option. I conclude that increasing government consumption until the demand meets the present
level of production and maintaining this fiscal policy during the recession is the best option.
Nevertheless, this option will be accompanied by large and accumulating government debts, but
these debts can be sustained if the government properly increases taxes in the future. This option
means that huge government debts will play an essential role as a buffer against negative effects
of the fundamental shock.
2 A MECHANISM OF RECESSION
2.1 An upward RTP shock
There are various possible sources of recession, but in this paper, a recession caused by a
fundamental shock, particularly by an upward shift of RTP, is examined because an upward
shift of RTP seems to be most likely the cause of the Great Recession (Harashima, 2016). A
2
technology shock was probably not the cause of the Great Recession because technology does
not suddenly and greatly regress. Frictions on price adjustments are also unlikely to be the cause
because the micro-foundation of friction does not seem to be sufficiently persuasive (e.g.,
Mankiw, 2001), particularly the micro-foundation of its persistence. On the other hand,
Harashima (2016) showed that an upward RTP shock could explain the occurrence of the Great
Recession and showed evidence that the estimated RTP of the United States increased in about
2008.
RTP plays an essential role in economic activities, and its importance has been
emphasized since the era of Irving Fisher (Fisher, 1930). One of the most important equations in
economics is the steady state condition
r
where is RTP and r is the real rate of interest. This condition is a foundation of both static and
dynamic economic studies. The mechanisms of both and r are equally important. Particularly,
RTP is an essential element in expectations of economic activities because RTP is the discount
factor for future utility. In addition, RTP has been regarded as changeable even over short
periods (e.g., Uzawa, 1968; Epstein and Hynes, 1983; Lucas and Stokey, 1984; Parkin, 1988;
Obstfeld, 1990; Becker and Mulligan, 1997). Furthermore, households behave based on the
expected RTP of the representative household (RTP RH) (Harashima, 2014, 2016). That is,
changes in RTP and the expected RTP RH can be an important source of economic fluctuations.
2.2 The model
The model in this paper is based on the models in Harashima (2004, 2009, 2013a) and assumes
non-cooperative, identical, and infinitely long living households, and that the number of
households is sufficiently large. Each of the households equally maximizes the expected utility
dtcutE
t
0
0
exp
subject to
tt
t cA,kf
dt
dk
,
where yt, ct, and kt are production, consumption, and capital per capita in period t, respectively;
A is technology and constant; u is the utility function;
tt
kAfy , is the production
function; and E0 is the expectations operator conditioned on the agents period 0 information set.
yt, ct, and kt are monotonically continuous and differentiable in t, and u and f are monotonically
continuous functions of ct and kt, respectively. All households initially have an identical amount
of financial assets equal to kt, and all households gain the identical amount of income
tt
kAfy , in each period. It is assumed that
0
t
t
dc
cdu
and
0
2
2
t
t
dc
cud
; thus, households
are risk averse. In addition,
0
,
t
t
k
kAf
and
0
2
2
t
t
k
kf
. Both technology (A) and labor
supply are assumed to be constant; that is, there is no technological progress or population
increase. It is also assumed that there is no depreciation of capital.
2.3 A Nash equilibrium of a Pareto inefficient path
3
t
k
The prior steady state
before the shock on : W
The posterior steady
state after the shock
Posterior line of 0
dt
dc
t
after the shock on
Line of 0
dt
dk
t
Z
Pareto inefficient transition
path
Prior line of 0
dt
dc
t
before the shock on
Pareto efficient
saddle path after
the shock on
Pareto efficient saddle
path before the shock
on
The effects of an upward shift in RTP are shown in Figure 1. Suppose first that the economy is
at steady state before the shock. After the upward RTP shock, the vertical line 0
dt
dc
t moves
to the left (from the solid vertical line to the dashed vertical line in Figure 1). To keep Pareto
efficiency, consumption needs to jump immediately from the steady state before the shock (the
prior steady state) to point Z. After the jump, consumption proceeds on the Pareto efficient
saddle path (the posterior saddle path) from point Z to the lower steady state after the shock (the
posterior steady state). As a result, negative economic growth rates continue for a long period,
but unemployment rates will not increase and resources will not be destroyed or left idle. Note
that an increase in household consumption means consuming the part capital indicated by the
gap between the posterior saddle path (the thin dashed curve) and production (the bold solid
curve) for each kt, which initially is the gap between point Z and W.
1
Figure 1: An upward RTP shock. All terms are defined in the text.
t
c
1 If depreciation of capital is assumed to exist, the consumption of excess capital will be achieved by a reduction of
investments that correspond to depreciated capital and an increase in consumer goods and services.
0
4
However, this discontinuous jump to Z will be uncomfortable for risk-averse
households that wish to smooth consumption. Households may instead chose a shortcut and, for
example, proceed on a path on which consumption is reduced continuously from the prior
steady state to the posterior steady state (the bold dashed line), although this shortcut is not
Pareto efficient. The mechanism for why they are very unlikely to jump consumption is
explained in Harashima (2004, 2009, 2013a) and also in the Appendix. Because households are
risk averse and want to smooth consumption, and are also intrinsically non-cooperative, they
behave strategically in game theoretic situations. Because of these features, when households
strategically consider whether or not the jump is better for them (i.e., they are in a game
theoretic situation), they will generally conclude that they obtain a higher expected utility if they
do not jump. Hence, households will not actually choose this path and instead will choose a
different transition path to the steady state (e.g., the bold dashed curve). Because this transition
path is not on the posterior saddle path, it is not Pareto efficient (I call this transition path a
Nash equilibrium of a Pareto inefficient path or more simply a Pareto inefficient transition
path). Therefore, the excess resources indicated by the gap between the posterior saddle path
(the thin dashed curve) and the Pareto inefficient transition path (the bold dashed curve) for
each kt (initially, the gap between points Z and X) will be destroyed or left idle. Unemployment
rates will increase sharply and stay high for a long period.
3 SHOULD THE GOVERNMENT FISCALLY
INTERVENE?
3.1 The governments options
3.1.1 The three options
When households choose a Nash equilibrium of a Pareto inefficient path, the government
basically has three options: (1) do not intervene, (2) increase government consumption, and
(3) cut taxes.
If Option (1) is chosen, the gap between the posterior saddle path and the Pareto
inefficient transition path (initially the gap between points Z and W) is not filled by any demand.
Therefore, unemployment rates increase sharply and huge amounts of resources are destroyed or
left idle. High unemployment rates and destruction of resources will continue until the economy
reaches the posterior steady state.
If Option (2) is chosen, government consumption is increased to fill the demand gap
between the posterior saddle path and the Pareto inefficient transition path, where government
consumption is indicated on a per capita basis similar to the other variables. Suppose for
simplicity that government consumption is zero before the shock. With increases in government
consumption, the path of the sum of government and household consumption (hereafter
combined consumption) can be equal to the posterior saddle path.
Conceptually, government consumption is the collective consumption of households
through government expenditures, for example, spending on various kinds of administrative
services that households receive. Therefore, increases in government consumption can be
substituted for decreases in household consumption. Nevertheless, government consumption
will not directly generate utility in households. In this sense, increases in government
consumption may be interpreted as forced increases in household consumption. Even if
households do not want these increases in government consumption, however, the increases will
work to increase aggregate demand. Option (2) therefore indicates a measure to compulsorily
fill the gap between aggregate demand and supply, even against households will, when the
economy proceeds on a Pareto inefficient transition path. Notice that the excess resources
cannot be used for investments because the economy would otherwise deviate from a path to the
steady state.
5
If Option (3) is chosen, households disposable incomes will increase, but if the
Ricardian equivalence holds, they will still proceed on a Pareto inefficient transition path.
Because household consumption does not change, high unemployment rates and destruction of a
huge amount of resources continue as in Option (1). Because there is a huge amount of excess
capital, no additional investment will be made. Nevertheless, if the Ricardian equivalence does
not hold, tax cuts may increase household consumption at least temporarily. Therefore, the
validity of Option (3) depends on the validity of the Ricardian equivalence. If households are
sufficiently rational, the Ricardian equivalence will basically hold at least in the long run.
Therefore, even if tax cuts are effective, they will be effective only in the short run, and these
short run effects will be reversed because the Ricardian equivalence will hold in the long run.
3.1.2 Financing
In Option (3), tax cuts are financed by borrowing from households. In Option (2), an increase in
the government consumption is financed by borrowing from or tax increases on households.
Nevertheless, financing by borrowing will be preferred in Option (2) because the Ricardian
equivalence may not necessarily hold in the short run. If the Ricardian equivalence does not
hold, increases in taxes may increase unemployment rates and thereby the main aim of
Option (2) cannot be fully achieved. Therefore, it is highly likely that an increase in government
consumption will be financed by government borrowing, and therefore borrowing is assumed in
this paper. However, financing by borrowing requires tax increases in the future to pay off the
debt with interest. Options (2) and (3) assume that necessary future tax increases are fully
implemented by the government.
In addition, it is assumed that a government borrows money only from its own people,
that is, not from foreigners because foreign borrowing means that foreigners also intervene in
addition to the government, and such intervention is beyond the scope of this paper.
3.2 Comparison among options
(1) Economic growth rate
Because production and consumption at the posterior steady state are lower than those at the
prior steady state, the rate of economic growth is equally negative during the transition in the
three options except for a subordinate option of Option (2), in which, as will be shown in
Section 4, it is zero. Nevertheless, there actually still will be steady technological progress
(remember that no technological progress is assumed in the model), and thereby the actual rates
of growth will not necessarily be negative or zero and may even be low but positive.
(2) Household utility
Households choose a Nash equilibrium of a Pareto inefficient path equally in the three options.
Therefore, the utilities of households are basically same in the three options.
(3) Unemployment
In Options (1) and (3), unemployment rates will rise sharply and stay high for a long period. In
contrast, in Option (2), high unemployment rates can be avoided because the gap of demand is
filled by increases in government consumption and thereby no resources are destroyed or left
idle.
(4) Government debt
In Option (1), government debt does not increase because the government does not borrow
additional money, but in Options (2) and (3), government debt will increase because of
continuous financing by borrowing. However, if taxes are raised properly to pay off the debt in
the future, government debt will stabilize in some future period.
3.3 Government debt
6
3.3.1 Is the government debt sustainable?
The usual arguments on sustainable government debts (e.g., Hamilton and Flavin, 1986; Bohn,
1995) are not applicable to the government debts in Options (2) and (3) because households
proceed on an unusual Pareto inefficient transition path, so an alternative approach is
necessary. Let dt be per capita extra government debts in period t that are accumulated in
Option (2) or (3). Because all dt are owned by households as assumed above, dt also indicates
the financial assets of households, and the other household assets (other than dt) are ignored for
simplicity. In the future, dt is redeemed with interest, but the redemption takes a long time.
Because the Ricardian equivalence will hold in the long run, it is assumed that household
consumption is not influenced by dt. Let zt be per capita taxes to redeem a part of dt in period t
and also let gt be additional government borrowing in Option (2) or (3) in period t. In Option
(2),
ttt gcy , (1)
and in Option (3),
ttt gcy (2)
for any t because no new investment is made in Options (2) and (3) and the household assets
other than the government bonds are ignored; yt and ct are per capita income and consumption
of households in period t. If the condition
tttt
zgdr (3)
is satisfied indefinitely in a certain future period, government debt never explodes; that is, it is
sustainable where 10 tt rr is the real interest rate. By equality (1) and inequality (3), the
condition for sustainability in Option (2) is
tttttt
zdrcy . (4)
By inequalities (2) and (3), if inequality (4) is satisfied indefinitely in a certain future period,
government debt is also sustainable in Option (3).
Because the household assets other than dt are ignored, the sum of a households
income and assets is
ttt cyd .
If the sum of a households income and assets exceeds zt, that is, if
tttt
cydz , (5)
then zt can be imposed in the sense that households have enough resources to fully pay taxes.
Hence, by inequalities (4) and (5), if
ttt ddr (6)
7
is satisfied, taxes that satisfy the condition for sustainable debts can be imposed. Here, because
10
t
r , then inequality (6) always holds. Therefore, for any dt, there always exists zt that
satisfies inequality (3) indefinitely in a certain future period. That is, the government debt can
be sustainable for any dt, and even if dt becomes extremely large, the debt can be sustainable.
Consider an extreme example. If a government collects taxes that are equivalent to dt from a
households financial assets in a period, the governments debts are eliminated completely all at
once. That is, any dt can be sustainable.
Such an extreme tax will not actually be imposed, but if dt exceeds a certain amount
such that
ttt zrdy ,
(i.e., if taxes exceed income), then they need to be collected from a part of a households
holdings of dt. If households well know the possibility of a tax on dt in the future, they will not
regard their accumulated financial assets corresponding to dt as their real assets in the sense
they can be freely used for consumption even though dt may be extremely large. In addition,
because any dt can be sustainable, the tax increase can be started even after all the excess capital
is eliminated. Hence, a huge amount of government debt can remain even if there is no excess
capital.
Finally, it is important to note that the increased tax revenues should not be used to
finance increases in government consumption for purposes other than dealing with the excess
capital. The increased taxes should be used only to pay down dt (with interest) because the
economy otherwise deviates from the steady state.
3.3.2 How large can government debt be?
Any dt can be sustainable but only if a government properly raises taxes and ttt zdr is
satisfied indefinitely in a certain future period. The question arises, however, when is a certain
future period? The time at which taxes are raised is indeterminate in the discussion in the
previous section. The tax increase can be postponed almost indefinitely if taxes will certainly be
raised eventually. This indeterminacy may generate a political struggle because people
intrinsically dislike tax increases, and opposition parties will utilize peoples anti-tax sentiment
as ammunition to attack the government. Opposition parties will appeal to people that a tax
increase is not necessary at present and that it will only generate a recession because the
Ricardian equivalence will not hold in the short run. The government may not sufficiently refute
this argument and persuade people that the current level of government debt is unsustainable,
because any dt can be sustainable. The incentive for the government to raise taxes to reduce dt
will therefore be weak.
Is there a problem, however, if dt becomes extremely large? As shown in Section 3.2.1,
other things being equal, any dt can be sustainable, but if something changes and affects the
sustainability as dt becomes larger, a large dt will
