According to the U.S constitution, the balanced budget amendment is a rule that requires the state to restructure from spending which is above their income. The balanced budget amendment requires the government to balance its spending. It needs to balance the amount it is going to spend on projects and other expenditures. There are also provisions that allow exception during national emergencies, war times or recession periods which allow the suspension of the rule while considering the supermajority vote. This approach has been ill advised and high criticized due to its economical effects. In accordance with the yearly budget even if it is in a good economy, the economies which are weaker are at most risk of falling into recession thus making them more serious and longer. They might also result in losing of jobs. The amendment, on the other hand, shall force the government to cut its spending, raise taxes on economies which are weak or which are already in recession. In an economy that is slow, the federal revenues grow in slows pace and spend more in catering for the unemployment insurances and other social programs which tend to increase during times of needs. In this situation, the deficit starts to rise.
Automatic stabilizers are described as elements of the transfer system and tax that interferes with the economy during crisis time or when it overheats. They usually offset changes in economic activities without any intervention from the policymakers. These are programs that are known to stabilize the economic cycles without government intervention. An example of automatic stabilizers is the personal taxes and corporate taxes. Transfer systems like the welfare and unemployment aid in stabilizing an economy that is shaky or unstable. In a case where the economy is rising and in a taxation structure, the taxes which are incorporated in national income shall fall and vice versa.
This was a very challenging situation for the policymakers. Central banks were forced to lower their interest rates to levels which were almost zero. They had to implement a wide range of nonstandard and extraordinary policy measures. The following are the lessons from the 2008 crisis for monetary policy; central bank independence is very critical when it comes to determining and delivering of price stability and mainly during times of crisis, it is very essential for the government to have a clear definition of price stability so that it might take precaution towards inflation expectations. The prices stability is an automatic stabilizer at times of crisis. Another lesson is that the financial stability and price stability are complementary. The monetary policy and macro-prudential function reinforce each other.
Keynes is among the most known and recognized economists in the world. Some of his contributions are; he helped people understand the relation which exists between unemployment, money, and prices. He published several policies which were of great help to many countries because they always adopted them so that they could sort issues which were affecting their state.
A real exchange rate is described as the domestic goods prices as compared to foreign goods. It is expressed as EP/P*. the increase in E which is nominal appreciation shall lead to the rise of the dollar price. This shall also have an impact of raising the relative price of domestic goods. An increase in P*, which is representing the price for foreign goods, shall increase the foreign currency which is related to foreign goods. This shall lead to a reduction of the price of domestic goods. And lastly, a rise in P which is the domestic price reflects that a rise in the value of dollar shall lead to increase in the value of domestic goods.
The US dollar is more valuable as compared to the Canadas dollar. Since this is a non-arbitrage condition, it means that it is not possible to make any money through earning of higher rate in the country which has a higher interest rate, just because the exchange rates tends to fluctuate less or more in proportion.