Achieving Economic Stability

1. Achieving Economic Stability

2. Chapter 16 section 1 • Which is an example of the uncertainty caused by economic instability? • A politician is reelected • A consumer delays a purchase • A manufacturer increases output • An economist measures the GDP gap • The social cost of economic instability include all of the following except:: • Stagflation • Wasted resources • Political instability • Crime and damage to family values • Which of the following statements is FALSE? • A healthy economy helps the country deal with its social problems • Economic Instability is at the root of all social problems • Economic instability can lead to reduced spending on social programs • A healthy economy helps people feel more certain about the future • Economists measure the cost of economic instability with • The misery index • The GDP gap • Constant GDP • Both a and b • Economic instability wastes all of the following except: • Human resources • Natural resources • Tax revenues • Capital resources

3. The Cost of Economic Instability • Forms of Economic instability • recession • High unemployment • Inflation • Stagflation: a period of stagnant growth combined with inflation • Experienced in 1970’s

4. The Cost of Economic Instability • Economics Cost • GDP gap: measures the differences between the actual GDP and the GDP that could have been achieved had all the resources been fully employed

5. The Cost of Economic Instability • The misery index: the sum of monthly inflation and unemployment rates • Uncertainty increases when GDP decreases

6. Social Cost • Economic Instability • Results in wasted labor, capital, and natural resources • Can lead to political instability • Associated with: • Increased crime • Lower levels of police protection • Less willingness by companies to hire disadvantaged people

7. Chapter 16 section 1 • Which is an example of the uncertainty caused by economic instability? • A politician is reelected • A consumer delays a purchase • A manufacturer increases output • An economist measures the GDP gap • The social cost of economic instability include all of the following except:: • Stagflation • Wasted resources • Political instability • Crime and damage to family values • Which of the following statements is FALSE? • A healthy economy helps the country deal with its social problems • Economic Instability is at the root of all social problems • Economic instability can lead to reduced spending on social programs • A healthy economy helps people feel more certain about the future • Economists measure the cost of economic instability with • The misery index • The GDP gap • Constant GDP • Both a and b • Economic instability wastes all of the following except: • Human resources • Natural resources • Tax revenues • Capital resources

8. Macroeconomic Equilibrium

9. Chapter 16 section 2 • Macroeconomic equilibrium is determined by the • Intersection of the supply curve and the demand curve • Aggregate supply curve • Intersection of the aggregate supply curve and the aggregate demand curve • The aggregate demand curve • What effect would a decrease in production cost for all firms have on the aggregate supply curve? The Curve would • Level off • Shift to the right • Shift to the left • Not change • What effect would a decrease in consumer savings have on the aggregate demand curve? The curve would • Level off • Shift to the right • Shift to the left • Not change • The aggregate demand curve has the slope it does because • It must intersect the aggregate supply curve • People willing to purchase less at higher prices • There is a single money supply of a fixed size in the economy at any one time • The market tends toward equilibrium • All of the following would cause aggregate supply to increase EXCEPT • An increase in labor productivity • An increase in interest rates • The development of new technologies • A decrease in government regulations

10. Aggregate Supply Total value of goods and services that all firms would produce in a specific period of time at various price level

11. Aggregate Supply Curve • Shows the amount of real GDP that could be produced at various price levels

12. Aggregate Supply Curve • Cost fall = ASC shifts to the right • Cost Rise = ASC shifts to the left

13. Aggregate Demand Total quantity of goods and services demanded at different price levels

14. Aggregate Demand Curve • Quantity of real GDP that would be purchased at various price levels

15. Aggregate Demand Curve • shifts curve to the right • Decrease in savings, • expectations of strong economy, • increase in transfer payments financed through deficit spending, • reduction in taxes shifts curve to the right

16. Aggregate Demand Curve • Shifts curve to the left • Increase in savings • Expectations of a weak economy • A decrease in transfer payments through deficit spending • An increase in taxes

17. Macroeconomic Equilibrium Level of real GDP consistent with a given price level, as determined by the intersection of the aggregate supply and aggregate demand curves

18. Macroeconomic Equilibrium • Achieved when aggregate supply equals aggregate demand • Does not provide exact predictions about the economy • Useful for analyzing macroeconomic trends

19. Chapter 16 section 2 • Macroeconomic equilibrium is determined by the • Intersection of the supply curve and the demand curve • Aggregate supply curve • Intersection of the aggregate supply curve and the aggregate demand curve • The aggregate demand curve • What effect would a decrease in production cost for all firms have on the aggregate supply curve? The Curve would • Level off • Shift to the right • Shift to the left • Not change • What effect would a decrease in consumer savings have on the aggregate demand curve? The curve would • Level off • Shift to the right • Shift to the left • Not change • The aggregate demand curve has the slope it does because • It must intersect the aggregate supply curve • People willing to purchase less at higher prices • There is a single money supply of a fixed size in the economy at any one time • The market tends toward equilibrium • All of the following would cause aggregate supply to increase EXCEPT • An increase in labor productivity • An increase in interest rates • The development of new technologies • A decrease in government regulations

20. Stabilization Policies

21. Chapter 16 section 3 • All of the following are elements of Keynesian economic framework EXCEPT • The consumption function • The multiplier • The Laffer curve • The accelerator • All of the following are related to demand-side policies EXCEPT • Fiscal policy • Monetarism • Keynesian economics • The output-expenditure model • Those who favor supply-side polices would tend to support the government playing • An expanded role in the economy • A reduced role in the economy • No role in the economy • A role in monetary policies only • Unemployment insurance and federal entitlement programs are two examples of • Supply side policy • Monetarism • Wage price controls • Automatic stabilizers • Which of the following policies would likely be favored by a monetarist? • Increasing the money supply at a steady rate determined by growth in real GDP • Increasing government spending to offset a reduction in spending in the investment sector • Lowering business tax rates to provide an incentive for businesses to produce more • Deregulating industries to minimize the government’s role in the economy

22. Demand-Side Policies • Federal Policies designed to increase or decrease total demand in the economy by shifting the aggregate demand curve to the right or left • Fiscal Policy: the federal governments attempt to stabilize the economy through taxing and government spending

23. Demand-Side Policies • John Maynard Keynes (1883-1946) was one of the most influential economists of the twentieth century. In addition to revolutionizing economic thinking about fiscal policy, he played a central role in the Bretton Woods Conference of 1944, which created the International Monetary Fund and the World Bank. • Keynesian Economics: a set of actions designed to lower unemployment by stimulating aggregate demand

24. Demand-Side Policies • Multiplier Effect: a change in investment spending will have a magnified effect on total spending • Accelerator effect: change in investment is caused by a change in overall spending, a downward economic spiral • According to Keynes: only the government is large enough to offset changes in investment spending

25. Demand-Side Policies • Automatic stabilizers = unemployment insurance and federal • Increase government spending whenever changes in the economy threaten people’s income • Long Run: • All attempts by gov’t to increase aggregate demand merely increase the price level without increasing GDP

27. Supply Side Policies • Reducing Taxes = increase in tax collections failed to materialize in the1980’s • Successful policies can shift aggregate supply • Moving economy into equilibrium • Seek to promote economic growth rather than economic stability

28. Laffer curve

31. Monetary Policies • Believe the money supply should be allowed to grow • Slow and steady • Trying to control inflation • Permit economic growth • Expanding the money supply cannot permanently affect rate of employment

32. Chapter 16 section 3 • All of the following are elements of Keynesian economic framework EXCEPT • The consumption function • The multiplier • The Laffer curve • The accelerator • All of the following are related to demand-side policies EXCEPT • Fiscal policy • Monetarism • Keynesian economics • The output-expenditure model • Those who favor supply-side polices would tend to support the government playing • An expanded role in the economy • A reduced role in the economy • No role in the economy • A role in monetary policies only • Unemployment insurance and federal entitlement programs are two examples of • Supply side policy • Monetarism • Wage price controls • Automatic stabilizers • Which of the following policies would likely be favored by a monetarist? • Increasing the money supply at a steady rate determined by growth in real GDP • Increasing government spending to offset a reduction in spending in the investment sector • Lowering business tax rates to provide an incentive for businesses to produce more • Deregulating industries to minimize the government’s role in the economy

33. Economics and Politics

34. Chapter 16 section 4 • The use of discretionary fiscal policy has declined for all of the following reasons EXCEPT • the relatively short duration of recessions • government gridlock • Congressional budget caps have limited federal spending • The government usually knows of upcoming recessions far in advance • The United States relies most on which of the following policies • Passive fiscal policies • Structural fiscal policies • Discretionary fiscal policies • Monetary policy • All of the following describes economist EXCEPT • Economists have different backgrounds • Economists are sharply divided into competing schools of thought with little overlap of ideas and beliefs • Economists sometime seem to offer conflicting advice • Economists are continually seeking new answers to new problems • Which is the best description of the role of the Council of Economic Advisors? • Report economic developments and propose strategies • Carry out monetary policy • Implement presidential economic policies • Keep the public informed about economic issues • A president might ignore the recommendations of professional economic advisors in order to • Avoid an unpopular decision • Adhere to the principles of political economics • Avoid participating in economic politics • Maintain presidential monetary authority

35. Changing Nature of Economic Policy • Discretionary fiscal policy • Used less today • Has increased the use of monetary policy • Passive Fiscal Policy • Contribute to stability of the American Economy • Structural Fiscal Policy • Designed to strengthen the economy in the long run • Does not deal with unemployment or inflation

36. Why Economist Differ • Choose polices that reflect their sense of which economic problems are most critical • Affected by the economic conditions prevailing in their lifetimes

37. Economic Politics • The Council for Economic Advisors • Advises the president of the United States on economic policy • Contribute to the understanding of economic activity • Help policy makers prevent another Great Depression, stimulate growth, help disadvantaged groups • Cannot help a country AVOID minor recessions

38. Chapter 16 section 4 • The use of discretionary fiscal policy has declined for all of the following reasons EXCEPT • the relatively short duration of recessions • government gridlock • Congressional budget caps have limited federal spending • The government usually knows of upcoming recessions far in advance • The United States relies most on which of the following policies • Passive fiscal policies • Structural fiscal policies • Discretionary fiscal policies • Monetary policy • All of the following describes economist EXCEPT • Economists have different backgrounds • Economists are sharply divided into competing schools of thought with little overlap of ideas and beliefs • Economists sometime seem to offer conflicting advice • Economists are continually seeking new answers to new problems • Which is the best description of the role of the Council of Economic Advisors? • Report economic developments and propose strategies • Carry out monetary policy • Implement presidential economic policies • Keep the public informed about economic issues • A president might ignore the recommendations of professional economic advisors in order to • Avoid an unpopular decision • Adhere to the principles of political economics • Avoid participating in economic politics • Maintain presidential monetary authority