17 Stabilizing The National Economy

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17 Stabilizing The National Economy

  1. 1. Stabilizing the National Economy Objective: Analyze the role the government plays in stabilizing the national economy
  2. 2. Stabilization Policies <ul><li>In order to reduce uncertainty in the economy the government uses monetary and fiscal policies; together these are called stabilization policies </li></ul>
  3. 3. Measuring Unemployment <ul><li>Unemployment rate is the percentage of the civilian labor force that is without jobs but is actively seeking employment </li></ul><ul><li>Types of unemployment include: </li></ul><ul><li>Cyclical- associated with the up and down movement of the business cycle </li></ul><ul><li>Structural- caused by changes in the economy </li></ul><ul><li>Seasonal </li></ul><ul><li>Frictional- temporary; changing jobs etc. </li></ul>
  4. 4. Inflation <ul><li>Demand-Pull: Theory the prices raise as the result of excessive business and consumer demand that results in shortages </li></ul><ul><li>Cost-Push: Theory that higher wages and profits push up prices </li></ul><ul><li>Stagflation: A combination of inflation and low economic activity </li></ul>
  5. 5. John Maynard Keynes <ul><li>Developed fiscal policy theories during the Great Depression </li></ul><ul><li>Keynes believed that forces of supply and demand operate too slowly in a serious recession and that the government should step in to stimulate demand </li></ul>
  6. 6. The Circular Flow Model of the Economy <ul><li>In an economy there are two markets in play </li></ul><ul><li>A resource market and a product market </li></ul>
  7. 7. Monetarism <ul><li>Is the theory that deals with the relationship between the amount of money the Fed places in circulation and the level of activity in the economy </li></ul><ul><li>Many economists believe should increase the money supply smoothly because when you increase the supply rapidly it could lead to inflation </li></ul>
  8. 8. Policy verses Reality <ul><li>Fiscal policy never matches fiscal reality because of two reasons </li></ul><ul><li>Political process to enact change takes too long </li></ul><ul><li>Lag times exist between the time policy is enacted and when it becomes effective </li></ul>
  9. 9. Review <ul><li>What two markets make up the Circular flow market? </li></ul><ul><li>Ans. Resource and Product market </li></ul><ul><li>What is Monetarism? </li></ul><ul><li>Ans. theory that deals with the relationship between the amount of money the Fed places in circulation and the level of activity in the economy </li></ul><ul><li>Name the different types of Unemployment? </li></ul><ul><li>Ans. Cyclical, Structural, Seasonal, and Frictional </li></ul>

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