¶ … Economic Theory Since the Great Depression, many Keynesian economists have been arguing that their basic approach is the best way to deal with issues that could have a long-term impact on the economy. At the heart of this basic philosophy, is the belief that when spending in the private sector is stagnant, the public segment can be able to deal with these challenges. The reason why, is because the government could engage in actions such as favorable monetary and fiscal policy. If this kind of approach is taken, it will help to provide additional demand. Once this occurs, it means that they can begin to stabilize the economy and prevent negative calamities from taking place. This is significant because, these basic ideas have often been used by economists throughout the decades to illustrate how this is one of the major tools that can be utilized to deal with a host of economic challenges. To fully understand these ideas and their underlying impact on economic activity requires examining a number of different elements to include: the various kinds of approaches that are used by these kinds of economists, how monetary theorists are using this to promote long-term economic stability, the impact of persistent deficits, analyzing the positions of supply economists when it comes to government debt, evaluating the national economic policy related to the trade deficit and evaluating the arguments for protectionist policies. Once this occurs, it will provide the greatest impact as to the underlying strengths and weaknesses surrounding these kinds of economic practices.

The different approaches that might be used by Keynesian theorists

There are two different approaches that are being used by Keynesian economists the most notable include: classic Keynesian thinking and the post war philosophy. The classic Keynesian economists are utilizing these ideas to influence the way the government is responding to different calamities. Where, the economy will begin to develop asset bubbles when individuals and businesses have been involved in various kinds of speculative activities. While at the same time, there are dramatic increases in the money supply. Over the course of time, this can lead to a situation where there will be extreme boom and bust cycles. Under this kind of approach the use of non-monetary tools can help to increase aggregate demand. The way it works is during periods of recessions, the government can introduce a series of stimulus programs that will help to increase demand such as: public works spending on infrastructure and supporting the banking system. This will provide a foundation for the economy, which will lead to an increase in demand. At which point, any kind of adverse effects of the recession will have been prevented. The reason why, is because the added spending by the government will help to stimulate demand. This will improve business confidence leading to increases in hiring and other activities. (Lipsey, 2007)

Under the post war philosophy, the economy and unemployment may not respond so quickly to massive public expenditures. As a result, there needs to be continuous amounts of massive public sector spending during these situations. Once this occurs, it will help to reduce unemployment and stimulate business activity. At which point, economic growth will resume as normal. ("New Keynesian Economics," 2011)

Monetary theorists to promote long-run macroeconomic stability.

The different monetary theorists believe that this approach will ensure long-term macroeconomic stability. The reason why, is because we are focusing on ways to improve aggregate demand through massive public sector spending. This will serve as an alternative in limiting the downside effects of a serve recession. Once this takes place, businesses will begin hiring and the overall standard of living will be able to improve. This due to the fact that the negative side effects of the recession were averted, which could have an adverse impact on: household wealth and personal income. (Lipsey, 2007) ("New Keynesian Economics," 2011)

Examine the impact of persistent budget deficits on the trade deficit and analyze the options available to policy makers when national savings presents opportunities to improve the trade deficit.

The effects of a persistent budget deficit on trade, is that it will begin to slowly eat away at the economic strength of the nation. The reason why, is because the overall amounts of will continue to become even larger over the course of time. Once this takes place, it means that financing different forms of long-term debt will become more expensive. This is based on the belief that the creditworthiness of the borrower (i.e....

The government) is being brought into question. Once the national saving rate has improved, policy makers can encourage businesses and individuals to invest the excess savings into a host of investments. This will increase exports, which will have a positive effect on reducing the trade deficit. (Lipsey, 2007) ("New Keynesian Economics," 2011)
Appraise the position of supply-side economists as it relates to government deficits.

Supply side economists believe that through: lowering the income tax rates on individuals and corporations this will improve business investment. At which point, businesses will begin to hire more employees and make significant purchases in expanding their operations. While consumers, will begin to increase spending because they have extra income. This will help to increase tax revenues, which is going to reduce the trade deficit by providing the government with greater amounts of income that it is receiving. (Roubini, 1997)

Evaluate recent national economic policies as they relate to the magnitude of the trade deficit

The massive amounts of government spending in the form of various bailout programs were effective at heading off the recession. However, they have had a limited impact on addressing issues surrounding the trade deficit. The reason why, is because these underlying amounts have been remaining in the same range and they have not reversed themselves. As, any kind of increase in economic activity will result in a huge improvement in demand for raw material (i.e. crude oil). This has caused the total amounts of spending on these products to rise, which has caused the trade deficit remain in this range and then become worse.

Evidence of this can be seen by looking no further than the trade deficit for July 2011. This number rose to $50.2 billion (the highest since 2008). At the heart of the increase, was a surge in demand for crude oil-based products. Part of the reason for this, is due to the fact that many emerging markets (i.e. China, India and Brazil) have only seen a temporary decrease in demand during the recession. This was followed by a massive pick up in these levels once the global economy began to stabilize. This is significant, because it is illustrating how the stimulus package was effective at helping to prevent a serve recession from occurring. However, the downside was that it did very little to curb demand for natural resources. As a result, even with a modest increase in economic activity, prices were able to increase to over $108 per barrel. This led to a rise in the trade deficit because of the increase in demand for these products. (MacEnzie, 2011)

Analyze the arguments for protectionist policies and the effect, if any, upon the trade deficit.

Under the different protectionist policies, many people believe that raising trade barriers will help to reduce the trade deficit. The reason why, is because they think that this will help to decrease the number of imported goods that are flowing into the nation. At which point, the higher amounts of tariffs will force consumers to purchase products that were built domestically. This will protect industry and reduce the current account deficit. The problem with this kind of thinking is that it is flawed. The reason why, is because these kinds of approaches will often result in retaliatory actions from trading partners. Where, they will impose similar kinds of restrictions on imports coming into their country. This will have an adverse impact on economic activity moving forward, with the economy slowing down dramatically.

When you analyze this argument, it is clear that this kind of approach will only make the underlying situation worse. The reason why, is due to the fact that it is an emotional response to the problems. Over the course of time, this can force the economy into a recession because of the dramatic reduction in trade. This will lead to massive layoffs and a slowing of economic growth worldwide.

A good example of this can be seen by looking no further than the Hawley Smoot Tariff. This was passed in 1930 and it was designed to help alleviate the effects of the Great Depression. The basic idea was that this would protect American jobs and it was going to increase revenues for the federal government. However, the results were that trade slowed dramatically, which made the underlying economic situation worse. The reason why is because other trading partners began to impose similar kinds of tariffs on American goods. Once this occurred, it meant that the impact of the economic slowdown became dramatically worse (essentially spreading the Great Depression around the globe). This is significant, because it is a…