Economics Chapter 17

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Economics Chapter 17

• Stabilizing the National Economy

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Section 1 Unemployment and Inflation

• Stabilization Policies
• Monetary Policy- Interest rates, the fed policies
• Fiscal Policy- How they spend tax dollars
• Unemployment rate- Percentage out of work and
  still seeking work
• Not counted, retired, students, and long-term
  hospital

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Unemployment

• Reasons
• Cyclical- Business cycle fluctuation
• Structural- Change in the economy, tech advances
• Seasonal
• Frictional- temporary, layoffs, firings ect.
• Full employment- unemployment around 5
• Underground Economy- unreported workers

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Inflation

• Demand-Pull Theory- excessive business and
  consumer demand raises Prices.
• Cost-Push inflation- Higher wages push up prices.
• Stagflation- Inflation plus low economic
  activity.

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Section 2 The Fiscal Policy Approach to
Stabilization

• Circular Flow of income and output- Income
  flowing between business and consumers.
• Leakage- removal of money income, taxes and
  savings
• Injections- business investment and government
  spending

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Fiscal Policy and Supply-side effects

• Producing jobs and cutting taxes as ways to
  stimulate the economy
• Supply-side effects- business tax credits for new
  capital equipment
• Bush used it in 2003
• Maximum tax from 39.6 to 35

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Section 3 Monetarism and the Economy

• Amount of money in circulation and the amount of
  economic activity
• Milton Friedman
• New money in the economy based on growth of GDP

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Government Policy according to Monetarists

• Monetary rule- smooth consistent growth in money
  supply.
• Inflation Targeting- use policy to keep inflation
  at a steady rate.
• Monetarist Theory and the Federal Reserve- Used
  in the 1980s

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Monetarists Criticism of Fiscal Policy

• The political process- Too many groups involved
  in Fiscal Policy
• Time lags- How long it takes fiscal policy to
  work.