Transcript Measuring and Managing the Economy Chapter 13

Unit 5
Chapter 13 Measuring
and Managing the
Economy
Chapter 14 Fiscal and
Monetary Policy
Measuring and Managing
the Economy Chapter 13
Economic indicators are statistics that
help economists assess the health of an
economy.
 Gross domestic product—the market
value of all goods and services produced
within a country during a given period of
time—measures a country’s total output.
 A steadily growing GDP is generally a sign
of a healthy economy.
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13.2 How Do Economists Measure
the Size of an Economy?
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Economists calculate GDP by adding the
spending from the four sectors of the
economy: household consumption, business
investment, government purchases, and net
of exports minus imports.
◦ Nominal GDP is calculated in current dollars.
◦ Real GDP is calculated in constant dollars to
compensate for the effects of inflation.
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There are limitations to using GDP to
measure an economy’s health.
◦ For example, it does not include unpaid or
volunteer work and ignores negative externalities.
13.2 How Do Economists Measure
the Size of an Economy?
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The unemployment rate is an economic indicator that
measures the percentage of the population that is
jobless and seeking work.
A low unemployment rate is generally a sign of a healthy
economy.
Economists calculate the unemployment rate using a
survey conducted by the Bureau of Labor Statistics. Eligible
workers are classified as employed, unemployed, or not in
the labor force.
Full employment does not mean 100 percent of workers are
employed, but that all available labor resources are being
used effectively.
An economy with full employment is said to have a natural
rate of unemployment.
13.3 What Does the Unemployment
Rate Tell Us About an Economy’s
Health?
There are limitations when using the
unemployment rate to measure an
economy’s health.
 It does not account for discouraged
workers who have given up looking for
jobs, involuntary part-time workers who
would prefer to work full-time, or
underground workers.
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13.3 What Does the
Unemployment Rate Tell Us
About an Economy’s Health?
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Inflation is the increase in the average price level
of goods and services in an economy.
The inflation rate is an economic indicator that
measures the percentage increase in inflation from
one time period to another.
Economists track inflation using the consumer
price index. The CPI is a price index for a
market basket of goods and services.
Changes in the average prices of these items
approximate the change in overall prices paid by
consumers.
Like GDP, prices can be measured in nominal and
real dollars.
13.4 What Does the Inflation Rate
Reveal About an Economy’s Health?
Inflation is caused by an increase in the
money supply, overall demand, or the
cost of the factors of production.
 Though Americans are accustomed to an
annual inflation rate of about 3.4 percent,
any inflation has economic costs.
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13.4 What Does the Inflation Rate
Reveal About an Economy’s
Health?
All economies experience periods of
growth and decline in economic activity
known as the business cycle.
 Economists use the key economic
indicators to determine an economy’s
position in the business cycle at any
given time.
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13.5 How Does the Business Cycle
Relate to Economic Health?
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The business cycle has
four phases: expansion,
peak, decline or
contraction, and trough.
When economic activity
reaches a trough, a new
expansion begins.
A recession is a decline
across an economy lasting
at least six months.
A depression is a
prolonged economic
downturn with plunging
real GDP and high
unemployment.
13.5 How Does the Business Cycle
Relate to Economic Health?
Chapter 14 Fiscal and
Monetary Policy
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Policymakers use fiscal and monetary policy
to keep the economy running smoothly.
◦ Fiscal policy uses the government’s power to tax
and spend.
◦ Monetary policy uses the Federal Reserve’s power
to regulate the money supply and interest rates.
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Before the Great Depression, the government
rarely intervened in the economy.
Classical economists believed government’s
role in the economy should be minimal.
14.2 What Are the Origins of
Modern Fiscal and Monetary
Policy?
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British economist John Maynard Keynes believed
that government spending could stimulate overall
demand during recessions. He championed the
use of fiscal policy to fight recession, including
deficit spending.
American economist Milton Friedman believed
controlling the money supply was key to
stabilizing the economy. Called monetarism, this
idea promotes the use of monetary policy to
expand and contract the money supply.
◦ Monetarism was tested during the stagflation of the
1970s, when monetary policy was used to combat
inflation.
14.2 What Are the Origins of
Modern Fiscal and Monetary Policy
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The federal government and policymakers
use fiscal policy to stimulate or slow down
the economy.
◦ • Expansionary fiscal policy tools: increased
government spending, tax cuts
◦ • Contractionary fiscal policy tools: decreased
government spending, tax increases
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Automatic stabilizers can also serve to
expand or contract the economy, because
they increase or decrease overall demand.
14.3 What Tools Does Fiscal Policy
Use to Stabilize the Economy?
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The Federal Reserve uses monetary policy to stabilize the
economy by managing the growth of the money supply and
interest rates.
◦ • An easy-money policy is an expansionary monetary policy
that speeds the growth of the money supply to prevent
recession.
◦ • A tight-money policy is a contractionary monetary policy
that slows the growth of the money supply to prevent inflation.
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The Federal Reserve’s most common policy tool is openmarket operations, or the buying and selling of government
securities.
Through open-market operations, the Fed can target the
federal funds rate. Other policy tools include the power to
establish bank reserve requirements and the discount rate.
14.4 What Tools Does Monetary
Policy Use to Stabilize the
Economy?
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Fiscal and monetary policy are both useful in
stabilizing the economy. However, several factors
limit their effectiveness, including time lags,
inaccurate forecasts, and concerns about the
national debt.
The national debt has continued to rise as the
federal government has continued to spend more
than it receives in revenue. The size of the debt
causes concern in several areas:
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government bankruptcy
burden on future generations
foreign-owned debt
the crowding-out effect
14.5 What Factors Limit the
Effectiveness of Fiscal and
Monetary Policy?