Download stabilization policy.notebook - S Hoyt

stabilization policy.notebook
December 08, 2016
Chapter 8: Stabilization Policy Productivity, Growth and Interest Rates
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stabilization policy.notebook
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Key points • Money is subject to supply and demand
• The supply and demand of money affects GDP, employment and inflation.
• High GDP growth means high economic growth (new jobs, more spending, good times)
• High growth also means higher prices (inflation) and that makes life hard for most people. 2
stabilization policy.notebook
December 08, 2016
• Low GDP growth means lower prices (low inflation) and more unemployment. • Unemployment goes up because there is a decrease in spending. • Governments want to regulate this to keep it in balance.
• Too much growth leads to higher and higher prices. • Very high prices leads to an economic collapse. • No growth at all leads to high unemployment rate. 3
stabilization policy.notebook
December 08, 2016
The Misery Index The Misery Index
• High unemployment is bad
• High inflation is bad
• High inflation and high unemployment is terrible. • As you can see, this happened in the late 1970's and early 1980's due to the price of oil. 4
stabilization policy.notebook
December 08, 2016
Fiscal Policy • Governments have programs to regulate economic growth and inflation rates. • These are called "Stabilization Programs". • Both Federal and Provincial governments do this. • The main tool is "fiscal policy"
• Fiscal policy refers to government spending and taxation levels. 5
stabilization policy.notebook
December 08, 2016
The Canadian government often increases or decreases spending to stimulate (or stop stimulating) the economy. 1.When would the government start spending more money?
2.When would they stop spending more money?
3. What would they do if inflation was the main problem? 4.What would they do if unemployment was the main problem?
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stabilization policy.notebook
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What would the government do if unemployment and inflation were both problems at the same time? Unfortunately, fiscal policy can't really help with this. Increasing spending will increase inflation. Decreasing spending will increase unemployment 7
stabilization policy.notebook
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How else do we increase or decrease growth?
1.Interest rates The Bank of Canada increases and decreases interest rates. Increase= borrowing more expensive and growth slows. Slow growth= lower inflation. Decrease=cheaper borrowing causing more people to borrow which causes more economic growth and higher inflation. Fast growth=higher inflation
2. Money Supply Small increase in money supply increases economic activity with no increase in inflation.
When economy is no longer held back by low money, inflation then starts to rise.
Small decrease will slow spending and bring the economy down and wil lower inflation. 8
stabilization policy.notebook
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The Phillips Curve
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Trade­off
As you can see from the Phillips' Curve, if we want 3% unemployment (sounds great!) we have to accept a 10% increase in prices! The numbers are not exact (efforts were made in the 1960's to come to real numbers, but the variables keep changing .
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Stagflation As we saw earlier, during the 1970's and early 1980's Canada and the U.S saw both high unemployment and high inflation. The trade­off was still true, but the numbers were much worse:
For example: To get 3% unemployment, we wouldn't get 10% inflation, we'd get 40% inflation. To get 10% inflation, we'd get 25% unemployment. 11
stabilization policy.notebook
December 08, 2016
Stagflation's Causes and Solutions Stagflation caused by oil prices
High oil prices affect:
Heating oil, gasoline, manufactured goods and just about everything. 1975 Anti­Inflation Program:
• Legal limits on wages, prices and profit increases. 12
stabilization policy.notebook
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Targets? Do we want 0% inflation? In an ideal world, maybe, but it doesn't happen without poor economic growth. Do we want 0% unemployment? No because some unemployment is natural. Bank of Canada Targets:
Inflation: 1­3% with stable and predictable movement (1991). 2015­2017 target is 2% current rate is 1.7%, expected to rise to 2% by end of 2016.
Current unemployment is 6.9% nation­wide.
Current GDP growth is 2% 13
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https://www.youtube.com/watch?v=3GTgniuxA50
The Bank of Canada and the government prefer higher unemployment (our natural rate (5.7­5.8%) is higher than the U.S rate) with stable growth and low inflation. 14
stabilization policy.notebook
December 08, 2016
NAIRU­­ non­accelerating inflation rate of unemployment This is the idea that there is an achievable unemployment rate that will not cause high inflation. If unemployment falls below NAIRU, inflation speeds up and the Bank of Canada and government step in.
Bank of Canada's possible actions: 1. Increase interest rate
2. Decrease money supply
Government of Canada's possible actions:
1. Reduce budget spending. If unemployment goes above NAIRU, inflation will be low, economic growth is low.
Bank of Canada's possible actions:
1. Decrease interest rate
2. Print more money.
Governments possible actions:
1. Spend more money (stimulus spending).
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More about NAIRU https://www.youtube.com/watch?v=2cQwvmkezas
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NAIRU is increasing
1. Changing composition of labour market
­­more young people seeking work
­­more women in work force 2. Employment insurance ­­discourages some people from taking jobs
­­encourages people who usually don't work to begin looking for work. 3. Increase in payroll taxes
­­ These make it more expensive to hire employees. 4. Industrial restructuring.
­­ Some industries closing, some new one's starting. Many jobs lost due to robotics. 5. Low productivity growth
­­If workers produce more product, the company can make more money without raising the price of a product. Workers can even get raises without raising the prices of the product. 6. Typically low Canadian dollar (since late 1970's) increases consumer prices. 17
stabilization policy.notebook
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Review
1. Why does the government not want unemployment to be at 0%?
2. What is the trade­off between unemployment and inflation?
3. Briefly describe "stagflation". What caused it in the 1970's? 4. What is NAIRU? 18
stabilization policy.notebook
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Automatic Stabilizers Programs exist which automatically help provide stability during times of low economic growth. Employment Insurance
Pros Covers people in their time of need, makes sure that people don't starve. Cons: Makes employees more expensive and reduces employee wages. Causes people to seek seasonal and temporary work instead of full time. Progressive Income Tax Pros: Wealthier people (who can handle more of an economic shock) lose more of there pay than those who can't afford to. Also, less spending on the part of the wealthy can reduce inflation. Cons: Some believe that this discourages people from seeking better paid work. 19
stabilization policy.notebook
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Discretionary Stabilizers
These have included wage and price controls, limits to profit making as well as stimulus. The biggest recently is the 2009 stimulus budget. Did the 2009 stimulus budget work?
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In our next unit, you are going to help decide the budget of Canada for the next year. 22