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The 1946 law committed the Federal Government to Maximize Employment and Economic Growth

The 1946 law committed the Federal Government to Maximize Employment and Economic Growth Maintain a stable price level Humphrey Hawkins in 1978 went further and committed the government to Reach an unemployment rate of 4 percent To stabilize the price level with a target inflation rate of 0%

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The 1946 law committed the Federal Government to Maximize Employment and Economic Growth

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  1. The 1946 law committed the Federal Government to • Maximize Employment and Economic Growth • Maintain a stable price level • Humphrey Hawkins in 1978 went further and committed the government to • Reach an unemployment rate of 4 percent • To stabilize the price level with a target inflation rate of 0% • To maintain steady economic growth

  2. The Goals of U.S. macroeconomic policy makers are captured in two laws • The Employment Act of 1946 • Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act)

  3. Business Cycle • Alternating rises and declines in the level of economic activity, sometimes extending over several years. • Peak – business activity has reached a temporary maximum • The economy is near or at full employment • The level of real output is at or very close to the economy’s capacity • The price level is likely to rise during this phase

  4. Business Cycle • Contraction/Recession – A period of decline in total output, income, employment and trade • Recession last 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy • The price level is likely to fall only if the recession is severe and prolonged.

  5. Business Cycle • Trough – Output and employment “bottoms out” • Output and employment are at its lowest levels • This phase may be either short-lived or quite long. • Recovery/Expansion – output and employment rise toward full employment • As recovery intensifies, price level may begin to rise before full employment and full-capacity production return

  6. Economic Cost of Unemployment • The basic economic cost of unemployment is forgone output • Potential production of goods and services is irretrievable lost when there aren’t enough jobs created for all who are able and willing to work • GDP Gap – actual GDP – Potential GDP

  7. Economic Cost of Unemployment • Arthur Okun was the first to quantify the relationship between the unemployment rate and the GDP Gap. • For every 1percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2% occurs

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