econ ch17 economic challenges
Post on 15-Jul-2015
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Inflation• Inflation is not occurring every time prices
go up. Inflation is an increase in the average level of price, not a change in a specific price.
Causes of Inflation
• Demand-Pull Inflation: shortages lead to price increases
• Hyperinflation: more than 500% inflation; often caused by over printing money (Germany in the 1920s)
• Cost-Push Inflation: Rising cost of goods/services sets off a chain reaction
The Costs of Inflation
• The amount of goods/services people can buy decreases. This hurts people with fixed incomes the most.
• Inflation makes it harder to judge the value of goods and services from one year to the next.
• Makes it difficult to plan spending. • Inflation hurts savers/hoarders but helps
borrowers. This still hurts lenders.
Government Strategies:
• The Federal Reserve is responsible for the nation’s monetary policy.
• Its helps control inflation by limiting the amount of money in circulation and by controlling the amount of interest banks pay for their loans.
Unemployment• unemployment rate: the percentage of
individuals in the civilian labor force who actively looked for a job that month but could not find one.
• In June 2005, the unemployment rate was about 5 percent—a relatively low number.
Misleading because: – The Bureau of Labor Statistics does not count people who are
too discouraged to continue to look for a job.– The government considers people employed even if the only
work they can find is a part-time job that pays very little.
Types of Unemployment
• Frictional unemployment: occurs whenever people leave their old jobs and before they have found new jobs. Rises in the spring. Can you guess why?
• Structural unemployment: a change in the economy that reduces the demand for a particular group of workers and their skills.
• Cyclical unemployment: there are not enough jobs to go around. Directly related to fluctuations in the business cycle
• Seasonal unemployment: caused by seasonal changes in the weather or in the demand for certain products.
The Limits of Full Employment
• Full employment does not mean zero unemployment. It means the lowest possible unemployment rate in a growing economy with all factors of production used as efficiently as possible.
When unemployment rate drops below 4.5% economists consider there to be full employment.
Government Policies:
• no easy solutions for unemployment• Automatic Stabilizers: automatically
provide benefits if the economy threatens the income of individual workers.– Unemployment Insurance: a federal
program that provides cash benefits for a specific period of time to workers who have lost their jobs through no fault of their own.
– Other examples: Welfare, Social Security, & Medicare.
Poverty• Poverty is usually defined as not having
enough income to buy the essentials—food, shelter, clothing, and other basic needs.
Measuring Poverty
• Poverty thresholds are dollar estimates of the amount of annual income needed to support families of various sizes.
• Poverty guidelines: a simplified version of poverty thresholds issued by the Department of Health and Human Services to determine who is eligible for various federal programs designed to help families in need.
Poverty & Ethnicity:
• In 2003, 24.4 percent of African Americans and 25.5 percent of Hispanics lived in poverty compared to 12.5 percent of the total population.
• Poverty rates were highest for families headed by single women, particularly if they were African- American or Hispanic.
• Economic principles cannot explain why there is more poverty among some groups than others.
• The answer lies in past patterns of social behavior—particularly in the history of discrimination.
Causes & Effects of Poverty
• unfavorable economic conditions,
• unstable home environments,
• illness or disability, • substance abuse,• discrimination,• and inadequate
education.
• Vicious Cycle: They are poor because they do not have the skills to be productive, but because they are poor, they don’t have the money to acquire the skills necessary to get a good job. To make matters worse, they also lack the money to provide their children with the kind of education that will help them find good-paying jobs in the future.
Government Anti-Poverty Programs
• Welfare programs: Local, state, and federal governments have created a number of programs to help the poor.
• Temporary Aid to Needy Families (TANF) is a monthly cash assistance program for poor families with children under the age of eighteen.
• The food stamp program allows needy individuals to exchange stamps for food products at authorized stores. In some places, the Electronic Benefits Transfer (EBT) has replaced actual food stamps with a debit card.
Government Anti-Poverty Programs
• The Child and Adult Care Food Program (CACFP), which provides federal grants of money and food to nonprofit elementary and secondary schools and child-care institutions so that they can serve milk, well-balanced meals, and snacks to children.
• The Special Supplemental Food Program for Women, Infants, and Children (WIC) provides food for pregnant and nursing women, as well as for infants and children under the age of five.
• Earned Income Tax Credit (EITC) is a reduction in the amount of income tax a worker owes.
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