Chapter 17 - Stabilizing the National Economy
Terms in this set (30)
a combination of high inflation and low economic activity (high unemployment)
what are 2 of the biggest threats to economic stability in the U.S.
unemployment and inflation
attempts by the federal government to keep the economy healthy. It includes monetary and fiscal policies.
the percentage of the civilian labor force that is unemployed but is actively looking for work. (It does not include those who have quit looking for work or those who are underemployed or can only find part time work.)
types of unemployment
unemployment associated with the ups and downs of the business cycle. It rises during recessions and falls during recoveries.
unemployment caused by technological advances or discoveries of natural resources. (Ex: workers replaced by computers or robots)
unemployment caused by a change in seasons or weather. (Ex: construction workers, landscapers, farmworkers)
temporary unemployment. A worker is between jobs because of firings, voluntuary searches for new jobs or retraining. (This type of unemployment always exists as people seek to change jobs)
the economy is considered to be fully employed when the unemployment rate is 5% or less.
people who do not follow state and federal laws about reporting earnings.
theories of inflation
attempt to explain by inflation occurs.
1: demand-pull inflation
2: cost-push inflation
prices rise as a result of excess business and consumer demand. Demand increases faster than total supply resulting in shortages that lead to higher prices.
reasons why demand-pull inflation occurs
1: If the money supply grows too rapidly, people will spend the money on a limited supply of goods.
2: Increases in government spending can also increase overall demand
3: Aggregate demand will also increase if taxes are reduced or if consumers save less and spend more.
what are possible results of demand-pull inflation
It will lead to an increase in output (quantity supplied) so it will reduce unemployment
theory that wage demands of labor unions push up prices
what is the possible result of cost-push inflation
This can result in stagflation: inflation and low economic activity. Prices are being adjusted because of higher labor costs not increased demand. Without increased demand for the product, businesses have no incentive to increase output and hire more workers.
the government's use of taxation and spending policies to affect overall business activity.
circular flow of income and output
economic model that pictures income as flowing continuously between consumers and business (see p. 448 of book)
leakages from the circular flow of income and output
savings and taxes.
injections of income into the circular flow of income and output
1: businesses borrowing money to invest further in their business
2: government spending
means the purchase of new plants and machinery and equipment for a business as well as building up inventories
supply side effects
things that affect the supply of the key ingredients of economic growth. For example, cutting taxes leads to more work, savings and investment.
Theory of monetarism
theory that deals with the relationship between the amount of money that the Fed places in circulation and the level of activity in the economy.
supporters of the theory of monetarism (Milton Friedman)
Government policy according to monetarists
monetarists believe that the money supply should be increased by 3 to 5% per year to promote stable economic growth and low inflation.
The Fed should allow the money supply to grow at a steady consistent rate per year and not use fiscal policy to try to stimulate or slow the economy
using monetary policy (the Fed) to achieve a specific targeted inflation rate
Monetarists' criticism of fiscal policy
monetarists believe that fiscal policy rarely matches reality for two reasons...
1: In the end, fiscal policy enacted is only a compromise between what the individual parties wanted
2: Time lag
periods between the time fiscal policy is enacted and the time it becomes effective