GOVERNMENT AND THE ECONOMY

Prior to 1930s Little government involvement Market outcomes prevailed Periodic problems

GOVERNMENT AND THE ECONOMY

Great Depression High unemployment,

low output Causes

Stock speculationIncreases in tariffsActions of Federal

Reserve System

Federal Government’s role since the 1930s

Provide jobs Maintain stable prices Promote growth

UNEMPLOYMENT

Types Frictional Structural Cyclical Seasonal

UNEMPLOYMENT

Measurement Monthly interviews Criteria

16 years or olderAvailable for workTried to find work

Full employment Current rate:

8.??%

INFLATION

General increase in pricesCause: Too much money

chasing too few goods

INFLATION

Unanticipated inflation: Who is harmed? Lenders People with fixed incomes

Anticipated inflation

MEASUREMENT

Monthly interviews

MEASUREMENT

Market Basket 2011Price $3.00/gal $4.50/lb

2012 Price 4.00/gal $6.00/lb

100 gal gas 10 lbs steak Total Cost

2011 Cost $300 $45 $3452012 Cost $400 $60 $460

Inflation Rate (460-345/345) = 33%

MEASUREMENT

Current rate: Consumer Price Index: About 1-2% Lower than in recent years

HYPERINFLATION

Definition: > 50%/monthJan 1.00Feb 1.50Mar 2.25April 3.38May 5.06June 7.60

July 11.39Aug 17.09Sept 25.62Oct 38.44Nov 57.67Dec 86.50Jan 129.74

HYPERINFLATION (cont)

Germany (after WWI)

1 egg MarksPre-War Price .08 Nov/1923 Price 80,000,000,000

HYPERINFLATION (cont)

Hungary (after WWII) Inflation rate:

3,810,000,000,000,000,000,000,000,000,000

HYPERINFLATION (cont)

Bolivia (1985) 118,000%

HYPERINFLATION (cont)

Turkey (now) exchange rate

HYPERINFLATION (cont)

Cause: Turning on the printing presses

People’s reaction?

GROWTH

Measurement Gross Domestic Product Dollar value of final goods and services

produced Current rate

Growing slowly

GROWTH

Important terms Recession: 6 months of declining output

2002, 2008-2009 Depression: Long period of falling prices

and output 30s

Balancing inflation and growth