Achieving Economic Stability

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

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

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

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

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

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

Macroeconomic Equilibrium

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 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

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

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

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

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

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

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

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

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

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

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 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

Stabilization Policies

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 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

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

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

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

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

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

Laffer curve The Laffer curve is based on the belief that a reduction in tax rates would raise rather than lower total tax collections. It was proposed that the lower rates would stimulate so much growth that the increase in revenues would more than make up for the decrease in tax rates. The hypothetical relationship was not borne out by experience in the 1980s, when tax rtes and tax revenues fell.

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

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 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

Economics and Politics

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

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

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

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

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