Study Guide 16 - Cost of Economic Instability

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stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

GDP gap

the difference between full-employment real GDP and actual real GDP

Misery Index

the inflation rate plus the unemployment rate or a measure of how bad the economy is

What produced stagflation in the 1970s?

People's fears and uncertainty

Why is even a small change in the GDP gap significant?

The amount of lost production and income can be enormous.

Name 3 social costs of economic instability

an unstable economy causes uncertainty, less buying

How can a healthy economy help society deal better with problems such as crime and family instability?

people have jobs and can provide for themselfs and families.

Aggregate Supply

Total supply of goods and services in an economy

Aggregate Supply Curve

shows the quantity of domestic product that is supplied at each possible value of the price level

Macroeconomic Equilibrium

occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS curve.

Fiscal Policy

The federal government efforts to keep the economy stable by increasing or decreasing taxes and government spending

Keynesian Economics

Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms.

Multiplier

a change in investment spending will have a magnatudinal effect on total spending.

Accelerator

change in investment spending caused by change in total spending.

Automatic Stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

Unemployment Insurance

program that gives payments to people who have lost their jobs until they find work again

Supply-side Economics

policies designed to stimulate output and lower unemployment by increasing production rather than demand.

Laffer Curve

If tax rates rise beyond a certain level they discourage economic growth, thereby reducing government revenues

Monetarism

places importance on the role of money and it's growth.

Wage-Price controls

regulations that make it illegal for businesses to give workers raises.

What are the 3 approaches that policymakers use to reach economic stability?

discretionary, passive or structural.

What are 2 goals of supply-sider economists?

against stagflation and demand-siders/monetarist.

What is the basic principle of monetarism?

Variations in unemployment and the rate of inflation are usually caused by changes in the supply of money.

Council of Economic Advisers

advises the President on the state of the economy

Discretionary

person who has been given written authorization from a customer to make trading decisions for the customer

Passive

hold back

Structural

underlying cause of problems, often require actions by the government

Name 4 causes of disagreements amongst economists

different criteria, different eras, monetarist, supply-side policies.

How do economic theories reflect a certain time in history?

rules are made for the economics at the time.

What does the term "economic politics" mean?

an economic war against the business cycle.

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