Transcript Stabilizing the National Economy

Stabilizing the National Economy
Ch 17
Ch 17 – 1 Unemployment and Inflation
 I. Measuring Unemployment
 A. The unemployment rate is the percentage of the civilian
labor force that is without jobs, but is activily seeking work.
 B. High unemployment is a sign that the economy is not doing
well.
 C. Full employment is when the unemployment rate is below 5
percent.
II. Inflation
 A. Acceptable levels of inflation are about 3 percent a year or
lower.
 B. Unpredictable inflation has a destabilizing effect on the
economy.
 C. Inflation can cause people’s standard of living to fall,
especially people on fixed incomes, such as retired people.
II. Cont.
 D. Demand-pull theory of inflation states that prices rise
because of high business and consumer demand.
 E. cost-push theory of inflation states that prices rise because
of excessive labor costs and business profits.
 F. Stagflation occurs when high inflation and unemployment
at the same time.
Ch 17 – 2: The Fiscal Policy Approach
to Stabilization
 I. John Maynard Keynes: believed that forces of aggregate
supply and demand operated too slowly in a serious
recession, and that the government should step in to
stimulate aggregate demand.
II. Circular Flow of Income
 A. Income flows from business to households in forms of
wages, rent, interest, and profits.
 B. Income flows back to business in forms of payments for
consumer goods and services.
 C. Leakages - $$$ removed from economy by taxes and
savings. Reduce aggregate demand
 D. Injections – business investments and government
spending. Increase aggregate demand
III. Fiscal Policy and Unemployment
 A. Keynesian economists believe the Great Depression was
caused by a high level of leakages.
 B. They think the government should have increased
injections of government spending or tax cuts.
 C. While the government did create many job programs in
the 1930’s, these were not enough to make up for decrease in
consumer demand.
IV. Fiscal Policy and Supply-Side Effects
 A. Supporters of fiscal policy believe that tax cuts lead to
increasing investment and jobs
 B. if people pay lower taxes, they will have more money to
spend, save and invest in a growing economy.
 C. These are called supply-side effects of fiscal policy.
17 – 3 Monetarism and the Economy
 I. The Theory of Monetarism
 A. States that the Fed should increase the money supply at a
smooth, given percent per year.
 B. If the economy operates below capacity, the extra demand
that results from the increase in the money supply will lead to a
rise in output.
 C. Businesses will hire more workers and unemployment will
decrease.
 D. If there is full employment, however, the increased demand
will lead to inflation.
II. Government Policy According to
Monetarists
 A. Monetarists oppose using fiscal policy as a way to control
the economy because the economy is so complex and so little
understood.
 B. They want the government to balance the federal budget,
so that the government would not be competing with
business for loans.
II. Cont
 C. They want the Fed to stop smoothing the ups and downs in
the economy.
 D. They want the Fed to allow the money supply to grow at a
steady rate.
 E. Monetarist theory actually influenced the Fed’s policies
during the 1980’s.
III. Monetarists’ Criticism of Fiscal
Policy
 A. The theory of fiscal policy is not the reality
 B. No single government body designs and implements fiscal
policy.
 C. Since there are differences of opinion about what fiscal
policy to institute, no single policy is actually enacted.
III. Cont.
 D. There is a time lag between when a policy is enacted and
when it is finally implemented.
 E. If the policy is implemented too late, then it has the
opposite affect.