Transcript Achieving Economic Stability

Achieving
Economic Stability
Chapter 16
Goals & Objectives
1. Economic & Social Costs of Instability.
2.
3.
4.
5.
6.
7.
8.
Aggregate Supply & Demand.
Macroeconomic equilibrium.
Operations & impact of fiscal policy.
Basic assumptions of monetary policy.
Monetary policy conflicts.
Differing economic viewpoints.
Politics and economics interaction.
The Cost of Economic Instability
 Characteristics of instability:
1. Recession
2. Unemployment
3. Inflation
 Stagflation: stagnant GDP with inflation.
 GDP Gap: actual (JIT) vs. potential production
possibility (JIC production)
 Misery Index or Discomfort Index: sum of monthly
inflation & unemployment rates
Stagflation (Impossible?)
Misery or Discomfort
Index
The Social Costs
1.
2.
3.
Wasted Resources: Unemployed
Labor, Idle factories, unused natural
resources
Political Instability: New political
movements (Realignments &
Dealignments). Incumbency defeats.
Crime & Family Values: no
opportunities increases crime & divorce.
Aggregate
1.
Aggregate Supply: “assuming” the
supply of money is at a constant; the
total value of all goods & services or GDP
Money Supply
2. Labor Productivity
3. Input Costs
1.
Aggregate
2. Aggregate Demand: “summary”
measure of all demand in the economy;
total quantity of goods & services at
different price levels.
Excludes Black Market items.
3. Macroeconomic Equilibrium: real GDP
consistent with price levels as determined
by the intersection of the supply & demand
curve.
Stabilization Policies
1. Demand Side Policies: Fiscal Policy:
Governments policy of Taxing and
Spending.
1. Designed to increase or decrease total demand.
1.
2.
3.
4.
Increase taxes = less income = decreased demand.
Decrease taxes = more income = increased demand.
Subsidies to producers. Increased or decreased
supply.
Entitlements to consumers: Increased demand.
Welfare Spending
Fiscal Policy
• Keynesian Economics: John Maynard
Keynes: British Socialist
– The General Theory of Employment, Interest,
and Money 1936.
1. 4th sector of an economy: Government
2. Short-run or temporary approach of government
taxing, subsidizing, and spending to increase or
decrease Demand.
Fiscal Policy & Interest Groups
Keynesian Framework
1. Government could take a Direct role in
the economy.
2. 1938: Public Salary Tax
3. 1942: Public Revenue Act: 1st payroll tax.
4. Business subsidies.
5. Federal Deficits.
6. Deficit Spending.
7. Inflation Policy
Automatic Stabilizers
• Key component of fiscal policy:
• 1. Unemployment Insurance
Compensation:
• 2. Social Security, Welfare, Medicare,
Medicaid.
• 3. Progressive Income Taxation.
Supply-Side Policies
1. Policies designed to stimulate output and
lower unemployment by increasing
production/supply rather than demand.
1.
Deflation Policy:
2. Smaller Role of Government: Fewer
federal regulatory agencies. Deregulation.
3. Low Federal Taxes: high taxes creates a
diminished incentive to produce or work.
Supply-Side Economics
4. Laffer curve: lower taxes increases the
number of workers which increases tax
revenues for the federal government.
Limitations of Supply-Side Policies:
1. Promotes economic growth rather than
creating welfare programs.
Lower tax rate increases government
revenue
Monetary Policies
Monetarism: role of money and GDP
growth.
The Federal Reserve and the discount
rate: Eliminate fiscal and supply side
policies and allow a constant supply of
money into the economy without
government interference (Politics).
Interest Rates & Inflation
1. Short Run; Expansionist monetary policy:
1.
2.
Shift supply curve to the right by lowering
interest rates for individuals and business.
Slow & Steady money supply to keep
inflation low.
2. Politics of Interest Rates & Inflation:
1.
Richard Nixon: wage-price controls: Wageincreases illegal. Increased prices
permission from the government.
Monetary Policy & Unemployment
1. Two Theories regarding cheap money or
low interest rates to keep unemployment
low.
1.
2.
Excessive rates of monetary growth drive up
prices and interest rates.
Long term inflation caused by excessive
monetary growth.
3 Types of Fiscal Policy
1. Discretionary Fiscal Policy: someone
must choose to implement. President or
Bureaucrat
1.
2.
3.
4.
5.
Recognition lag: Beginning of a recession to the
awareness of a recession.
Implementation lag: Time to counter a recession.
Short duration of recessions (8 months).
Political gridlock: Divisive politics surrounding
budgetary matters.
Budget caps: Designed to limit federal spending.
3 Types of Fiscal Policy
2. Passive Fiscal Policy: gov’t programs
and economic stability.
1. Automatic Stabilizers:
2. Progressive Income Taxes:
3. Structural Fiscal Policy: Long term
economic planning.
1. Affordable Care Act 2014
2. Welfare Reform Bill 1996
Politics of Monetary Policy
Federal Reserve is a private or
independent lender & supplier of our
nation’s money supply.
Monetarist Point of View: Long term
solutions with little short term relief.
1.
2.
Monetary Growth with Fiscal Policy.
Monetary Growth with Supply-Side Policy.
ACA Spending