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Transcript
Chapter Introduction Section 1: Unemployment and Inflation Section 2: The Fiscal Policy Approach to Stabilization Section 3: Monetarism and the Economy Visual Summary Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth. In this chapter, read to learn about the factors that destabilize the economy and the actions that can be taken in response. Section Preview In this section, you will learn why unemployment and inflation are two major threats to a nation’s economic stability. Content Vocabulary • stabilization policies • unemployment rate • full employment • underground economy • demand-pull inflation • stagflation • cost-push inflation Academic Vocabulary • expert • survey • adapt Is an unemployment rate of 5% acceptable? A. Yes B. No C. Not sure 0% A A. A B. B C.0%C B 0% C Measuring Unemployment Unemployment can be classified as cyclical, structural, seasonal, or frictional. Measuring Unemployment (cont.) • The federal government uses stabilization policies to keep the economy healthy. • The unemployment rate is one statistic that all economists look at. View: Measuring Unemployment Measuring Unemployment (cont.) • Many types of unemployment exist, so not all unemployment can or should be eliminated. • Types of unemployment: – Cyclical – Structural – Seasonal – Frictional View: Reasons for Unemployment Measuring Unemployment (cont.) • Economists generally consider the economy at full employment when the unemployment rate is around 5%. • Unemployment rates are an estimate; survey results are also imperfect because of the underground economy such as tax evaders and drug traffickers. Economists consider the economy at full employment when the unemployment rate is around what percent? A. 2% 0% D 0% A D. 10% A B C 0% D C C. 7% A. B. C. 0% D. B B. 5% Inflation Inflation is caused by excessive expansion of the money supply or government spending, according to the demand-pull theory. Inflation (cont.) • Like the unemployment rate, inflation can be a major national problem. View: Two theories of Inflation Inflation (cont.) • Two competing ideas have developed concerning inflation: – The demand-pull theory • Fed allows the money supply to grow too rapidly leading to higher demand and increased prices. • Increases in government spending and business investment can increase demand. • Aggregate demand can increase if taxes are reduced or consumers begin saving less. Inflation (cont.) – The cost-push theory • Unemployment can remain high during these periods of cost-push inflation. • According to some economists, stagflation is a result of cost-push inflation. Which theory do you think makes more sense and why? A. Demand-pull theory B. Cost-push theory A. A B. B 0% A 0% B Section Preview In this section, you will learn how government taxation and spending can be used to stimulate or slow the growth of the national economy. Content Vocabulary • fiscal policy • circular flow of income and output Academic Vocabulary • remove • offset Should the government use deficit spending to stimulate the economy? A. Yes B. No C. Not sure 0% A A. A B. B C.0%C B 0% C The Circular Flow of Income and Output Keynesian economists advocate the use of government spending to stimulate economic activity and reduce unemployment during recessions. The Circular Flow of Income and Output (cont.) • John Maynard Keynes developed fiscal policy theories during the Great Depression. • He believed that government should step in to stimulate aggregate demand during a recession. The Circular Flow of Income and Output (cont.) • The circular flow of income and output is important to the Keynesian theory. • Monies that are removed or outside the circular flow of income, such as consumer savings, are referred to as leakage. View: Circular Flow of Income and Output The Circular Flow of Income and Output (cont.) • Injections of income into the economy, through business investment and government spending offset leakages. Is government taxation a leakage or injection? A. Leakage B. Injection A. A B. B 0% A 0% B Fiscal Policy and Supply-Side Effects Supply-side economists advocate reductions in tax rates to stimulate private investment and employment. Fiscal Policy and Supply-Side Effects (cont.) • Ways to fight unemployment and stimulate the economy include: – Job programs – Cuts in federal taxes – Giving businesses tax credits on investments Fiscal Policy and Supply-Side Effects (cont.) • Supply-side effects are the result of tax cuts that lead to more work, savings and investments. Which action do you feel would work the best to stimulate the economy? A. Job programs B. Cuts in taxes B A A. A B. B 0% C. 0% C 0% C C. Tax credit for businesses Section Preview In this section, you will learn about the theory that the control of the money supply by the Federal Reserve, rather than fiscal policy, should be used to stabilize the economy. Content Vocabulary • monetarism • monetarists • monetary rule • inflation targeting • time lags Academic Vocabulary • guideline • target Are you familiar with the term monetarism? A. Yes B. Somewhat C. Not at all 0% A A. A B. B C.0%C B 0% C The Theory of Monetarism Monetarists favor monetary policy rather than fiscal policy to stabilize the economy. The Theory of Monetarism (cont.) • Many economists who do not favor fiscal policy as a way of stabilizing the economy believe monetary policy is the answer. • Monetarists support the monetarism theory. • Monetarism is often linked with economist Milton Friedman. The Theory of Monetarism (cont.) • Monetarists believe that the Fed should increase the money supply at a smooth, given percent each year in order to avoid inflation. Do you tend to agree more with a fiscal policy or a monetary policy? A. Fiscal policy B. Monetary policy A. A B. B 0% A 0% B Government Policy According to Monetarists Monetarists believe that the money supply should be increased at a steady rate of 3 to 5 percent each year for stable economic growth with low inflation. Government Policy According to Monetarists (cont.) • Monetarists are opposed to using fiscal policy to stimulate or slow the economy. They believe: – The government should balance the federal budget. – The Fed should follow a monetary rule at a rate of 3 to 5 percent per year. – Steady growth within strict guidelines is best way to stabilize the future economy. Government Policy According to Monetarists (cont.) • Some countries use inflation targeting to retain economic stability. View: Changing Fed Policies According the monetarists, the money supply should grow at which rate per year? A. 10–15% B. 6–8% C. 5–9% D. 3–5% 0% A A. B. C. 0% D. B A B C 0% D C 0% D Monetarists’ Criticism of Fiscal Policy Monetarists believe that the main problem with fiscal policy is that it cannot be implemented effectively. Monetarists’ Criticism of Fiscal Policy (cont.) • Monetarists believe that the theory of fiscal policy seldom matches reality for two main reasons: – No single government body designs and implements fiscal policy. – There are various time lags between when it is enacted and when it becomes effective. View: Implementing Fiscal Policy Do you agree or disagree with the monetarists’ view of fiscal policy? A. Strongly disagree B. Mildly disagree C. Mildly agree D. Strongly agree 0% A A. B. C. 0% D. B A B C 0% D C 0% D One of the major goals in stabilizing the national economy is maintaining a low unemployment rate. Economists classify unemployment as one of four types. According to the demand-pull theory of inflation, prices rise as the result of high demand. The cost-push theory states that high wages push up prices. Most economists subscribe to one of two theories on the best way to stabilize the economy. Economic Concepts Transparencies Transparency 16 Unemployment Transparency 17 Inflation & Deflation Transparency 19 Fiscal Policy Select a transparency to view. stabilization policies: attempts by the federal government to keep the economy healthy; includes monetary and fiscal policies unemployment rate: percentage of the civilian labor force that is unemployed but is actively looking for work full employment: condition of the economy when the unemployment rate is lower than a certain percentage established by economists’ studies underground economy: transactions by people who do not follow federal and state laws with respect to reporting earnings demand-pull inflation: theory that prices rise as the result of excessive business and consumer demand; demand increases faster than total supply, resulting in shortages that lead to higher prices stagflation: combination of inflation and stagnation (low economic activity) cost-push inflation: theory that higher wages push up prices fiscal policy: federal government’s use of taxation and spending policies to affect overall business activity circular flow of income and output: economic model that pictures income as flowing continuously between businesses and consumers monetarism: theory that deals with the relationship between the amount of money the Fed places in circulation and the level of activity in the economy monetarists: supporters of the theory of monetarism, often associated with Milton Friedman monetary rule: monetarists’ belief that the Fed should allow the money supply to grow at a smooth, consistent rate per year and not use monetary policy to stimulate or slow the economy inflation targeting: a possible central bank policy in which the head of the central bank is given a specified annual rate of inflation as a goal time lags: periods between the time fiscal policy is enacted and the time it becomes effective To use this Presentation Plus! product: Click the Forward button to go to the next slide. 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