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Econ Ch17 Economic Challenges
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Econ Ch17 Economic Challenges

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  • 1. Chapter Economic Challenges 17
  • 2. Objective:
    • Students identify economic challenges that persist in free markets.
  • 3. 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.
  • 4. 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
  • 5. Significant inflation is almost always associated with slower growth in real GDP.
  • 6. 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.
  • 7.  
  • 8. 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.
  • 9. 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.
  • 10.  
  • 11. 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.
  • 12. 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.
  • 13. 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.
  • 14. Poverty
    • Poverty is usually defined as not having enough income to buy the essentials—food, shelter, clothing, and other basic needs.
  • 15.  
  • 16.  
  • 17. 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.
  • 18. Poverty Line
  • 19. 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.
  • 20. 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.
  • 21. 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.
  • 22. 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.
  • 23. Can You Answer?
    • How does inflation differ from other price increases?
    • What methods do governments use to reduce inflation? Unemployment? Poverty?
    • What are three reasons for inequality in income?