Download 1999 South-Western College Publishing

Survey
yes no Was this document useful for you?
   Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Transcript
Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
1
Chapter 28
Can Government
Really Stabilize the
Economy?
5/25/2017
©1999 South-Western College Publishing
2
This chapter discusses
principles associated with
The
Rational
Expectations
School
The
Keynesian
School
on
The
The
Neo-Keynesian
Supply-Side
School
School
on
on
The
Classical
School
on
Phillips
Automatic
Curve
Stabilizers
Analysis
on
Employment
&
Inflation
Employment
&
Inflation
Employment
Employment
and
Inflation
Inflation
Employmentand
& Inflation
©1999 South-Western College Publishing
3
What are the basic Schools
of Economic Thought?
• Classical • Supply-side
• Keynesian • neo-Keynesian
• Monetarism
• Rational Expectations
©1999 South-Western College Publishing
4
What is
Classical Economics?
Because the economy is
always tending toward a
full employment
equilibrium, there is no
need for government
intervention
©1999 South-Western College Publishing
5
What are the two
propositions of
Classical Economics?
1. All markets are
basically competitive
2. All prices are flexible
©1999 South-Western College Publishing
6
How do the Classical
Economists explain
unemployment?
Unemployment is a
temporary situation caused
by wage rates climbing
above equilibrium
©1999 South-Western College Publishing
7
What about the
long-run?
Wage rates will adjust,
bringing about full
employment in the
long-run
©1999 South-Western College Publishing
8
Real Wage and Employment
S
W1
W2
D1
Q2 Q1
9
©1999 South-Western College Publishing
9
According to Classical
Economists, why might
unemployment be persistent?
People interfere with the
competitive process
©1999 South-Western College Publishing
10
How do people
interfere with the
competitive process?
• Unions
• Minimum wage laws
©1999 South-Western College Publishing
11
According to Classical
Economists, what should
the government do during
periods of unemployment?
NOTHING
©1999 South-Western College Publishing
12
How do the Classical
Economists explain
inflation?
Money supply
increases
©1999 South-Western College Publishing
13
Money
Velocity
Prices
MV
P=
Q
GDP
©1999 South-Western College Publishing
1
14 4
Who controls the level
of money and therefore
the price level?
The Federal Reserve
©1999 South-Western College Publishing
15
How much should the
Fed increase the
money supply?
Approximately equal to the
long-run full employment
rate of growth, about 3%
©1999 South-Western College Publishing
16
What is
Keynesian Economics?
Government intervention
when the economy is in
a less than full
employment equilibrium
©1999 South-Western College Publishing
17
According to the
Keynesians, why do we
have unemployment?
Unemployment is the
result of insufficient
aggregate demand
©1999 South-Western College Publishing
18
What is the solution to
Unemployment?
Use government’s fiscal
policies to increase
aggregate demand
©1999 South-Western College Publishing
19
Where does the money
come from to increase
aggregate demand?
The government practices
deficit spending
©1999 South-Western College Publishing
20
What is a Recessionary
Gap?
The difference in real GDP
between a less than full
employment equilibrium
and the real GDP at the full
employment equilibrium
©1999 South-Western College Publishing
Aggregate Expenditure
Recessionary Gap
C+I+G
C+I+G
less than full employment
full employment
Real GDP
©1999 South-Western College Publishing
What is the New Deal?
President Roosevelt’s
policies of the 1930’s
to increase aggregate
demand by stimulative
fiscal policies
©1999 South-Western College Publishing
23
What is the Employment
Act of 1946?
Congress officially declares
that it is the continuing
policy and responsibility
of the federal government
to take an active role in
the economy
©1999 South-Western College Publishing
24
How do the Keynesians
view inflation?
They are not worried
about inflation
©1999 South-Western College Publishing
25
What is the Economics
of Fine-Tuning?
The government becoming more
proficient at fiscal policy,
managing deficit and surplus
budgets to create full employment
equilibrium with no inflation
©1999 South-Western College Publishing
26
For what were the
Keynesians ill prepared?
The stagflation of the
1970’s, when we had high
rates of both
unemployment and
inflation
©1999 South-Western College Publishing
27
How do the views of
Keynesians differ from those
of neo-Keynesians?
The neo-Keynesians
emphasized the possibility
that an economy can be in
equilibrium at less than full
employment with inflation
©1999 South-Western College Publishing
28
What is the
Phillips Curve?
A graph showing the
inverse relationship
between the economy’s
rate of unemployment
and the rate of inflation
©1999 South-Western College Publishing
29
Rate of Inflation
The Phillips Curve
Rate of Unemployment
©1999 South-Western College Publishing
3
30 0
According to the neoKeynesians, what is the
relationship between
inflation and
unemployment?
©1999 South-Western College Publishing
31
The neo-Keynesians believe that
a fall in the unemployment rate
causes the rate of inflation to
increase, and a rise in the rate
of inflation causes the rate of
unemployment to decrease
©1999 South-Western College Publishing
32
What is
the significance of the HumphreyHawkins Act of 1978?
It modified the Full
Employment Act of 1946,
altering its role to now
promote a livable point on the
Phillips curve
©1999 South-Western College Publishing
33
What caused an increase
in costs in the 1970’s?
• OPEC increased the world
price of oil
©1999 South-Western College Publishing
34
How do the neoKeynesians explain the
1970’s Phillips Curve
Instead of one Phillips
curve, there was a set
of Phillips curves
©1999 South-Western College Publishing
35
Rate of Inflation
The 1970’s Phillips Curve
Rate of Unemployment
©1999 South-Western College Publishing
3
36 6
What is the Rational
Expectations School?
Government’s policy of
managing aggregate demand
is undermined because of
people’s anticipation of
consequences
©1999 South-Western College Publishing
37
What is an example of
the negative effect of
anticipation?
When workers anticipate an
increase in aggregate
demand, they will bargain
for higher wages to protect
them from inflation
©1999 South-Western College Publishing
38
What does the long-run
Phillips curve look like?
It is effectively vertical
©1999 South-Western College Publishing
39
What policy implications
are associated with the
rational expectations
school?
Government cannot
increase employment in
either the short or long
run.
©1999 South-Western College Publishing
40
What is the Laffer Curve?
Increasing tax rates from
zero increases tax revenues
up to a point - beyond that
point increases will shrink
the economic pie because
of disincentives
©1999 South-Western College Publishing
41
The Laffer Curve
Tax Revenue
©1999 South-Western College Publishing
4
42 2
What is the point to the
Laffer Curve?
An increase in taxes might
lead to lower tax revenues
©1999 South-Western College Publishing
43
What is Crowding Out?
A fall in private
investment spending
caused by an increase in
government spending
©1999 South-Western College Publishing
44
How can government
borrowing cause
Crowding Out?
Interest rates can be
driven up, leaving less
money available for
private investment
©1999 South-Western College Publishing
45
What are
Automatic Stabilizers?
Structures in the economy
that tend to add to
aggregate demand when
the economy is in a
recession, and subtract
during inflation
©1999 South-Western College Publishing
46
What are some examples
of Automatic Stabilizers?
Unemployment benefits
The progressive income tax
©1999 South-Western College Publishing
47
http://www.whitehouse.gov
http://stats.bls.gov/eag.table.html
http://www.bog.frb.fed.us/releases/
h15/data/m/prime.txt
http://thomas.loc.gov
http://www.bls.gov
http://www.westegg.com/inflation
©1999 South-Western College Publishing
4
48 8
• What are the basic Schools of
Economic Thought?
• What is Classical Economics?
• What is Keynesian Economics?
• According to the Keynesians, why do
we have unemployment?
• What is the Employment Act of 1946?
• What is neo-Keynesian Economics?
• What is the Phillips Curve?
49
• What is Demand-side Inflation?
• What is Supply-side Inflation?
• What is the Rational Expectations
School?
• What is Supply-side Economics?
• What is the Laffer Curve?
• What is Crowding Out?
• Upon what do economists agree?
• What are some examples of
Automatic Stabilizers?
50
END
©1999 South-Western College Publishing
51