Transcript Economics: Today and Tomorrow

Chapter Introduction
Section 1: Unemployment and
Inflation
Section 2: The Fiscal Policy
Approach to
Stabilization
Section 3: Monetarism and the
Economy
Visual Summary
Governments strive for a balance
between the costs and benefits of
their economic policies to promote
economic stability and growth.
In this chapter, read to learn
about the factors that destabilize
the economy and the actions that
can be taken in response.
Section Preview
In this section, you will learn why
unemployment and inflation are two major
threats to a nation’s economic stability.
Content Vocabulary
• stabilization policies
• unemployment rate
• full employment
• underground economy
• demand-pull inflation
• stagflation
• cost-push inflation
Academic Vocabulary
• expert
• survey
• adapt
Is an unemployment rate of 5%
acceptable?
A. Yes
B. No
C. Not sure
0%
A
A. A
B. B
C.0%C
B
0%
C
Measuring Unemployment
Unemployment can be classified as
cyclical, structural, seasonal, or
frictional.
Measuring Unemployment (cont.)
• The federal government uses
stabilization policies to keep the
economy healthy.
• The unemployment rate is one statistic
that all economists look at.
View: Measuring Unemployment
Measuring Unemployment (cont.)
• Many types of unemployment exist, so not
all unemployment can or should be
eliminated.
• Types of unemployment:
– Cyclical
– Structural
– Seasonal
– Frictional
View: Reasons for Unemployment
Measuring Unemployment (cont.)
• Economists generally consider the
economy at full employment when the
unemployment rate is around 5%.
• Unemployment rates are an estimate;
survey results are also imperfect because
of the underground economy such as tax
evaders and drug traffickers.
Economists consider the economy at
full employment when the
unemployment rate is around what
percent?
A. 2%
0%
D
0%
A
D. 10%
A
B
C
0%
D
C
C. 7%
A.
B.
C.
0%
D.
B
B. 5%
Inflation
Inflation is caused by excessive
expansion of the money supply or
government spending, according to the
demand-pull theory.
Inflation (cont.)
• Like the unemployment rate, inflation can
be a major national problem.
View: Two theories of Inflation
Inflation (cont.)
• Two competing ideas have developed
concerning inflation:
– The demand-pull theory
• Fed allows the money supply to grow too rapidly
leading to higher demand and increased prices.
• Increases in government spending and
business investment can increase demand.
• Aggregate demand can increase if taxes are
reduced or consumers begin saving less.
Inflation (cont.)
– The cost-push theory
• Unemployment can remain high during these
periods of cost-push inflation.
• According to some economists, stagflation
is a result of cost-push inflation.
Which theory do you think makes
more sense and why?
A. Demand-pull theory
B. Cost-push theory
A. A
B. B
0%
A
0%
B
Section Preview
In this section, you will learn how
government taxation and spending can be
used to stimulate or slow the growth of the
national economy.
Content Vocabulary
• fiscal policy
• circular flow of income and output
Academic Vocabulary
• remove
• offset
Should the government use deficit
spending to stimulate the economy?
A. Yes
B. No
C. Not sure
0%
A
A. A
B. B
C.0%C
B
0%
C
The Circular Flow of Income and
Output
Keynesian economists advocate the
use of government spending to
stimulate economic activity and reduce
unemployment during recessions.
The Circular Flow of Income and
Output (cont.)
• John Maynard Keynes developed fiscal
policy theories during the Great Depression.
• He believed that government should step
in to stimulate aggregate demand during a
recession.
The Circular Flow of Income and
Output (cont.)
• The circular flow of income and output
is important to the Keynesian theory.
• Monies that are removed or outside the
circular flow of income, such as consumer
savings, are referred to as leakage.
View: Circular Flow of Income and Output
The Circular Flow of Income and
Output (cont.)
• Injections of income into the economy,
through business investment and
government spending offset leakages.
Is government taxation a leakage or
injection?
A. Leakage
B. Injection
A. A
B. B
0%
A
0%
B
Fiscal Policy and Supply-Side
Effects
Supply-side economists advocate
reductions in tax rates to stimulate
private investment and employment.
Fiscal Policy and Supply-Side
Effects (cont.)
• Ways to fight unemployment and stimulate
the economy include:
– Job programs
– Cuts in federal taxes
– Giving businesses tax credits on
investments
Fiscal Policy and Supply-Side
Effects (cont.)
• Supply-side effects are the result of tax
cuts that lead to more work, savings and
investments.
Which action do you feel would work
the best to stimulate the economy?
A. Job programs
B. Cuts in taxes
B
A
A. A
B. B
0%
C. 0%
C
0%
C
C. Tax credit for businesses
Section Preview
In this section, you will learn about the
theory that the control of the money supply
by the Federal Reserve, rather than fiscal
policy, should be used to stabilize the
economy.
Content Vocabulary
• monetarism
• monetarists
• monetary rule
• inflation targeting
• time lags
Academic Vocabulary
• guideline
• target
Are you familiar with the term
monetarism?
A. Yes
B. Somewhat
C. Not at all
0%
A
A. A
B. B
C.0%C
B
0%
C
The Theory of Monetarism
Monetarists favor monetary policy
rather than fiscal policy to stabilize the
economy.
The Theory of Monetarism (cont.)
• Many economists who do not favor fiscal
policy as a way of stabilizing the economy
believe monetary policy is the answer.
• Monetarists support the monetarism
theory.
• Monetarism is often linked with economist
Milton Friedman.
The Theory of Monetarism (cont.)
• Monetarists believe that the Fed should
increase the money supply at a smooth,
given percent each year in order to avoid
inflation.
Do you tend to agree more with a
fiscal policy or a monetary policy?
A. Fiscal policy
B. Monetary policy
A. A
B. B
0%
A
0%
B
Government Policy According to
Monetarists
Monetarists believe that the money
supply should be increased at a steady
rate of 3 to 5 percent each year for
stable economic growth with low
inflation.
Government Policy According to
Monetarists (cont.)
• Monetarists are opposed to using fiscal
policy to stimulate or slow the economy.
They believe:
– The government should balance the
federal budget.
– The Fed should follow a monetary rule at
a rate of 3 to 5 percent per year.
– Steady growth within strict guidelines is
best way to stabilize the future economy.
Government Policy According to
Monetarists (cont.)
• Some countries use inflation targeting to
retain economic stability.
View: Changing Fed Policies
According the monetarists, the
money supply should grow at which
rate per year?
A. 10–15%
B. 6–8%
C. 5–9%
D. 3–5%
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Monetarists’ Criticism of Fiscal
Policy
Monetarists believe that the main
problem with fiscal policy is that it
cannot be implemented effectively.
Monetarists’ Criticism of Fiscal
Policy (cont.)
• Monetarists believe that the theory of fiscal
policy seldom matches reality for two main
reasons:
– No single government body designs and
implements fiscal policy.
– There are various time lags between
when it is enacted and when it becomes
effective.
View: Implementing Fiscal Policy
Do you agree or disagree with the
monetarists’ view of fiscal policy?
A. Strongly disagree
B. Mildly disagree
C. Mildly agree
D. Strongly agree
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
One of the major goals in stabilizing the
national economy is maintaining a low
unemployment rate. Economists classify
unemployment as one of four types.
According to the demand-pull theory of
inflation, prices rise as the result of high
demand. The cost-push theory states that
high wages push up prices.
Most economists subscribe to one of two
theories on the best way to stabilize the
economy.
Economic Concepts
Transparencies
Transparency 16 Unemployment
Transparency 17 Inflation & Deflation
Transparency 19 Fiscal Policy
Select a transparency to view.
stabilization policies: attempts by
the federal government to keep the
economy healthy; includes monetary
and fiscal policies
unemployment rate: percentage of
the civilian labor force that is
unemployed but is actively looking for
work
full employment: condition of the
economy when the unemployment rate
is lower than a certain percentage
established by economists’ studies
underground economy:
transactions by people who do not
follow federal and state laws with
respect to reporting earnings
demand-pull inflation: theory that
prices rise as the result of excessive
business and consumer demand;
demand increases faster than total
supply, resulting in shortages that
lead to higher prices
stagflation: combination of inflation
and stagnation (low economic
activity)
cost-push inflation: theory that
higher wages push up prices
fiscal policy: federal government’s
use of taxation and spending policies
to affect overall business activity
circular flow of income and output:
economic model that pictures income
as flowing continuously between
businesses and consumers
monetarism: theory that deals with
the relationship between the amount
of money the Fed places in circulation
and the level of activity in the
economy
monetarists: supporters of the theory
of monetarism, often associated with
Milton Friedman
monetary rule: monetarists’ belief
that the Fed should allow the money
supply to grow at a smooth,
consistent rate per year and not use
monetary policy to stimulate or slow
the economy
inflation targeting: a possible central
bank policy in which the head of the
central bank is given a specified
annual rate of inflation as a goal
time lags: periods between the time
fiscal policy is enacted and the time it
becomes effective
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