Economics: Principles and Practices

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Transcript Economics: Principles and Practices

Chapter Introduction
Section 1: Macroeconomic
Section 2: Stabilization
Section 3: Economics and
Visual Summary
Do you remember Hurricane
Katrina or the invasion of Iraq
and the subsequent war? How
did these events—along with
growing demand—affect gasoline
prices? Did the higher gasoline
prices change the spending
habits of you and your friends?
How and why? Conduct a simple
survey of your friends and family
to find out how higher prices
impacted their lives. Present the
survey to your class. Read
Chapter 15 to learn what the
government might do to stabilize
the economy.
Economics provides
strategies, theories, and
analytical tools to deal with
everyday problems.
Section Preview
In this section, you will learn that macroeconomic
equilibrium takes place at the intersection of
aggregate demand and aggregate supply.
Content Vocabulary
• macroeconomics
• aggregate demand
• equilibrium price
• aggregate demand curve
• aggregate supply
• macroeconomic
• aggregate supply curve
Academic Vocabulary
• framework
• unduly
Macroeconomics refers to
A. Businesses or
B. Economy as a whole
A. A
B. B
0% C 0%
C. Specific parts of
the economy
Macroeconomic Equilibrium
• Macroeconomics seeks balance through
supply and demand.
Aggregate Supply and Demand
Aggregate supply and
demand help us study supply
and demand for the economy
as a whole.
Aggregate Supply and Demand (cont.)
• Supply and demand tools help determine
equilibrium price and quantity of output.
• Aggregate supply assumes money
supply is fixed and that a given price level
– If price changes, individual firms
respond by adjusting their output.
The Aggregate Supply Curve
Aggregate Supply and Demand (cont.)
– After many price changes, an aggregate
supply curve can be constructed.
• Price level includes the price of everything
produced in the economy.
• Real GDP—value of all goods and services
The Aggregate Supply Curve
Aggregate Supply and Demand (cont.)
• Changes in aggregate supply
– A decrease in the cost of production
factors = increase in output and real GDP
– An increase in the cost of production
factors = decrease in aggregate supply
The Aggregate Supply Curve
Aggregate Supply and Demand (cont.)
• Aggregate demand is the total of all
demand in the economy.
• The aggregate demand curve shows the
amount of total output purchased at every
price level.
The Aggregate Demand Curve
Aggregate Supply and Demand (cont.)
• Changes in aggregate demand
– An increase in consumer spending
increases aggregate demand.
– A decrease in consumer spending
decreases aggregate demand.
The Aggregate Demand Curve
When you go out and spend your money
on music and entertainment instead of
saving it, what impact does that have on
the aggregate demand curve?
D. Slope of curve shifts right
C. Curve shifts to the left
B. Curve shifts to the right
A. Slope of the curve
shifts left
Macroeconomic Equilibrium
Macroeconomic equilibrium is
reached when the level of real
GDP is consistent with a
given price level.
Macroeconomic Equilibrium (cont.)
• Aggregate supply and demand curves
provide a framework to help analyze the
impact of economic policy proposals on
economic growth and price stability.
• Macroeconomic equilibrium is the point
at which the level of real GDP is consistent
with a given price level.
The Global Economy & YOU
Personal Savings Rate
Macroeconomic Equilibrium (cont.)
• The equilibrium will change if either AS or
AD changes.
The Economy in Equilibrium
Why is the study of macroeconomic
equilibrium important?
A. Helps economists analyze the
impact of economic policy ideas
on growth and stability.
D. Helps economists determine
Americans’ level of savings
C. Provides us with exact
predictions on the way and
direction things will change
A. A
B. B
C.0%C 0%
D. D
B. Provides an idea on the way
and direction things will change
Section Preview
In this section, you will learn how government can
promote economic growth through economic
Content Vocabulary
• Medicare
• accelerator
• fiscal policy
• automatic
• Keynesian
• multiplier
• entitlements
• deregulation
• monetarism
• unemployment • wage-price
Academic Vocabulary
• unstable
• supply-side
• explicit
Medicare provides health-care to the
A. Elderly
B. Working poor
C. Employees of
the government
D. Young
A. A
B. B
C. 0%C
D. D
Stabilization Policies
• Medicare expenditures—continually rise,
shifting aggregate demand curve to
the right
Demand-Side Policies
Demand-side policies are
designed to affect total
demand through taxing,
government spending, and
automatic stabilizers.
Demand-Side Policies (cont.)
• Demand-side policies are designed to
increase or decrease total demand in
the economy.
– Fiscal policy is derived from
Keynesian economics.
• John Keynes used the outputexpenditure model.
• GDP = C + I + G + F
Profiles in Economics:
John Maynard Keynes
Demand-Side Policies (cont.)
• Investment sector was unstable.
• Magnified the effect on other spending—
• The accelerator can lead the economy in a
downward spiral.
Demand-Side Policies (cont.)
• Role of government acccrding to John Keynes:
– Only government is big enough to
counterbalance changes in investmentsector spending.
– Directly—major construction or
rehabilitation projects
– Indirectly—altering taxes
– Government’s risk of a short-term deficit
unfortunate but necessary
Demand-Side Policies (cont.)
• Problem with Keynesian theory: Federal
government does not limit spending when
business spending increases.
• Automatic stabilizers—another
component of fiscal policy
– Entitlement programs
• Unemployment insurance
– Progressive income tax
Fiscal Policy and Aggregate Demand
The combined multiplier-accelerator
effect contributes to GDP
A. growth.
B. instability.
D. none of the above.
A. A
B. B
C. 0%
D. D
C. loss.
Supply-Side Policies
Supply-side economics
focuses on policies that
increase production
through less government
and lower taxes.
Supply-Side Policies (cont.)
• Supply-side policies—designed to
stimulate output by increasing production
– Popular with President Reagan’s
– Reduce government’s role in the economy
Supply-Side Policies (cont.)
• Reduce number of federal agencies
• Spend less at federal level
• Deregulation
• Lower federal taxes
• Laffer curve
Comparing Supply-Side and
Demand-Side Policies
Supply-Side Policies (cont.)
• Successful supply-side policies produce
more at every price level.
• If no corresponding change in aggregate
demand, real output grows and price
Tax Rates and Tax Receipts
Supply-Side Policies (cont.)
• Limitations of supply-side policies
– Not enough experience to know how
they affect economy
– Designed to promote growth, not
remedy economic instability
Supply-Side Policies and Aggregate Supply
What is the goal of supply-side or
demand-side policies?
A. Increase production/output
B. Decrease unemployment
D. All of the above
A. A
B. B
C.0%C 0%
D. D
C. Keep inflation same
or lower
Monetary Policies
Monetarist policies seek
steady economic growth by
controlling the money supply.
Monetary Policies (cont.)
• Monetarism—primarily concerned with
the role of money in the economy
– Fluctuations can be destabilizing,
leading to unemployment and inflation.
– Contractionary monetary policy—money
supply is tightened, raising interest rates
– Expansionary policy—increases the
money supply and lowers interest rates
Monetary Policies (cont.)
• In short run, monetary policy has a
significant impact on demand for
real GDP.
• Long run impact—increase possibility of
future inflation
• Growth of money supply should equate to
growth of real GDP and productivity.
– Wage-price controls—an approach to
control inflation by President Nixon
Monetary Policies (cont.)
• Desired changes are difficult to time with
monetary policy.
• Not effective for short term unemployment
but effective for long-term price stability.
Monetarists believe
A. Wage-price controls should
be used to promote money
supply growth.
D. Money supply growth should
be fast and rapid.
C. Money supply growth should
equate to the growth total of
real GDP and labor.
A. A
B. B
C.0% C 0%
D. D
B. Growth of money supply
should be slow and steady.
Section Preview
In this section, you will learn that economic
policies change as time and circumstances
Content Vocabulary
• monetary policy
• baby boomers
• Council of Economic Advisers
Academic Vocabulary
• ideology
• advocates
Who are the baby boomers?
A. Individuals born between
1936 and 1945
C. Individuals born between
1929 and 1935
A. A
B. B
C. C
B. Individuals born between
1946 and 1964
Changing Nature of Economic Policy
The government can influence
the economy with
discretionary, passive, or
structural fiscal policies.
Changing Nature of Economic Policy
• Fiscal policies—government attempts to
influence economy through tax and
• Types of fiscal policy
– Discretionary fiscal policy is policy that
someone must choose to implement.
– Passive fiscal policies do not require
new or special action to go into effect.
Changing Nature of Economic Policy
– Structural fiscal policies are policies
designed to strengthen the economy
over a longer period of time.
• For several reasons, discretionary fiscal
policy is used less today.
– The various lags that inevitably occur
between recognizing that there is a
problem and actually doing something
about it
Changing Nature of Economic Policy
– The gridlock that can occur when the
political parties in Congress oppose
each other’s views on the budget
– Ideology
Changing Nature of Economic Policy
• The declining use of discretionary fiscal
policy left a void filled by the Federal
Reserve System, which has the
responsibility for conducting monetary
What has increased to replace the
decreased use of discretionary fiscal
A. Structural fiscal policy
C. Passive fiscal policy
A. A
B. B
0% C 0%
B. Monetary policy
Economics and Politics Today
Current conditions shape the
views of economists and
policy makers.
Economics and Politics Today (cont.)
• Economists and politicians work together
fairly closely.
• Economists’ thinking differs
– Differing critical problems
– Economic theories are a product of the
• Baby boomers
Economics and Politics Today (cont.)
• Council of Economic Advisers reports
economic developments/strategies to
• Economists have
– Developed statistical measures of the
economy’s performance
– Helped Americans become more aware
of the workings of the economy
Economics and Politics Today (cont.)
– Learned enough to prevent another
Great Depression
– Devise policies to stimulate growth,
lower inflation and unemployment
– Made the American economy more
Do you think your representatives to
Congress care about the economic
consequences of their decisions?
A. Yes
C. Somewhat
A. A
B. B
C.0% C
B. No
Aggregate Supply and Demand In order to
understand the economy as a whole, we need to study
aggregate supply and demand. The economy reaches
macroeconomic equilibrium when aggregate supply
and demand are equal at a given price level.
Stabilization Policies The government can pursue
three different policies to stabilize and grow the
Influences on Economic Policies Several factors
influence economic policies.
John Maynard Keynes
• His “Keynesian economics”
caused governments to
implement fiscal policy
• Instrumental in the planning
of the World Bank
Economic Concepts
Transparency 14 Aggregate Supply
Transparency 15 Aggregate Demand
Transparency 18 Monetary Policy
Transparency 19 Fiscal Policy
Select a transparency to view.
part of economics that deals with the
economy as a whole
equilibrium price
price where quantity supplied equals
quantity demanded
aggregate supply
the total value of all goods and
services that all firms would produce
in a specific period of time at various
price levels
aggregate supply curve
hypothetical curve showing different
levels of real GDP that would be
produced at various price levels
aggregate demand
the total value of goods and services
demanded at all different price levels
aggregate demand curve
hypothetical curve showing different
levels of real GDP that would be
purchased at various price levels
macroeconomic equilibrium
level of real GDP consistent with a
given price level and marked by the
intersection of aggregate supply and
aggregate demand
point of reference
too much
federal health-care program for senior
citizens, regardless of income
fiscal policy
use of government spending and
revenue collection measures to
influence the economy
Keynesian economics
government spending and taxation
policies suggested by John Maynard
Keynes to stimulate the economy
magnified change in overall spending
caused by a change in investment
change in investment spending
caused by a change in overall
automatic stabilizer
program that automatically provides
benefits to offset a change in people’s
broad social program that uses
established eligibility requirements to
provide health, nutritional, or income
supplements to individuals
unemployment insurance
government program providing
payments to unemployed workers
supply-side policies
economic policies designed to
stimulate the economy by increasing
relaxation or removal of government
regulations on business activities
school of thought stressing the
importance of stable monetary growth
to control inflation and stimulate longterm economic growth
wage-price controls
policies and regulations making it
illegal for firms to give raises or raise
prices without government permission
openly and clearly expressed
monetary policy
actions by the Federal Reserve
System to expand or contract the
money supply in order to affect the
cost and availability of credit
baby boomers
people born in the United States
during the historically high birthrate
years from 1946 to 1964
Council of Economic Advisers
three-member group that devises
strategies and advises the president
of the United States on economic
a set of beliefs
supports; speaks in favor of
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