Economics Chapter 17Economics Chapter 17

Stabilizing the National Stabilizing the National EconomyEconomy

Section 1: Unemployment and Section 1: Unemployment and InflationInflation

Stabilization PoliciesStabilization Policies Monetary Policy- Interest rates, the fed Monetary Policy- Interest rates, the fed

policiespolicies Fiscal Policy- How they spend tax dollarsFiscal Policy- How they spend tax dollars

Unemployment rate- Percentage out Unemployment rate- Percentage out of work and still seeking workof work and still seeking work Not counted, retired, students, and long-Not counted, retired, students, and long-

term hospitalterm hospital

UnemploymentUnemployment

ReasonsReasons CyclicalCyclical StructuralStructural SeasonalSeasonal FrictionalFrictional

Full employment- unemployment Full employment- unemployment around 5%around 5%

Underground Economy- unreported Underground Economy- unreported workersworkers

InflationInflation

Demand-Pull Theory- excessive Demand-Pull Theory- excessive business and consumer demand business and consumer demand raises Prices.raises Prices.

Cost-Push inflation- Higher wages Cost-Push inflation- Higher wages push up prices.push up prices.

Stagflation- Inflation plus low Stagflation- Inflation plus low economic activity. economic activity.

Section 2: The Fiscal Policy Section 2: The Fiscal Policy Approach to StabilizationApproach to Stabilization

Circular Flow of income and output- Circular Flow of income and output- Income flowing between business Income flowing between business and consumers.and consumers. Leakage- removal of money income, Leakage- removal of money income,

taxes and savingstaxes and savings Injections- business investment and Injections- business investment and

government spendinggovernment spending

Fiscal Policy and Supply-side Fiscal Policy and Supply-side effectseffects

Producing jobs and cutting taxes as Producing jobs and cutting taxes as ways to stimulate the economyways to stimulate the economy Supply-side effects- business tax credits Supply-side effects- business tax credits

for new capital equipmentfor new capital equipment Bush used it in 2003Bush used it in 2003 Maximum tax from 39.6% to 35%Maximum tax from 39.6% to 35%

Section 3: Monetarism and the Section 3: Monetarism and the EconomyEconomy

Amount of money in circulation and Amount of money in circulation and the amount of economic activitythe amount of economic activity

Milton FriedmanMilton Friedman New money in the economy based on New money in the economy based on

growth of GDPgrowth of GDP

Government Policy according to Government Policy according to MonetaristsMonetarists

Monetary rule- smooth consistent Monetary rule- smooth consistent growth in money supply.growth in money supply.

Inflation Targeting- use policy to Inflation Targeting- use policy to keep inflation at a steady rate.keep inflation at a steady rate.

Monetarist Theory and the Federal Monetarist Theory and the Federal Reserve- Used in the 1980sReserve- Used in the 1980s

Monetarists’ Criticism of Fiscal Monetarists’ Criticism of Fiscal PolicyPolicy

The political process- Too many The political process- Too many groups involved in Fiscal Policygroups involved in Fiscal Policy

Time lags- How long it takes fiscal Time lags- How long it takes fiscal policy to work.policy to work.