Chapter 17 – Identifications Answered

Section 1-The Cost of Economic Stability

D.Poole

1.The Economic Costs

In the past, recessions brought inflation under control. Recessions still reduced inflation somewhat, but the economy began to encounter stagflation, a period of stagnant growth and inflation. The GDP gap is the difference between the actual GDP and the potential GDP that could be produced if all resources were fully employed. It is a measure of cost of unemployed resources in terms of output not produced. The misery index sometimes called the discomfort index is the sum of the monthly inflation and unemployment rates. It is a more comprehensive measure of consumer suffering during periods of high inflation and unemployment. When real GDP declines, a great deal of uncertainty exists. This uncertainty usually translates into purchases that are not made, causing some jobs to be lost.

K.Flemming; R.Ford

2. The Social Costs

The cost of instability can be measured in dollars rather easily, but it is harder to measure in terms of human suffering. In human terms, everyone agrees that stability must be achieved. Economists are interested not only in the production of society, but its mental and social health as well.

Wasted Resources: Human suffering during periods of instability goes beyond not having more goods and services that raises the standard. The labor resource is wasted with people wanting work but not being able to find it.

Wasted resources are not limited to just human resources. Factories with idle capacity are waiting. Political Instability: Politicians also suffer from the consequences of economic instability. When times are hard, voters are dissatisfied, and incumbents are often thrown out of office. As a result, economic stability adds to the political stability of our nation.

High crime rates, too few economic and social opportunities for minorities, the loss of individual freedoms, and the lack of instability for many Americans are all grounds for concern. When the economy is healthy, society can more easily deal with its social problems. A healthy economy means that people will be more certain of their ability to provide for themselves and their families.

J.Harp

3.Aggregate Supply

When: If the price that consumers are willing to pay increases, producers

would increase their production.

What: Summary measure of the demand of all economic units in the economy.

Who: Individual firms try to maximize their profit by finding the quantity

of output at which the marginal cost of producing the next unit of output

equal to marginal revenue.

Why: It shows the amount of real GDP that could be produced at various price

levels.

Where: Any expansion of real GDP.

Section 2 – Macroeconomic Policies

4. Aggregate Demand – Similar to aggregate supply. First reason, summary of demand of all economic units in the economy. Second, represented in form of graph. Third, aggregate demand can either increase or decrease over time. Aggregate demand curve shows the quantity of real GDP that would be purchased at each possible price level in economy slopes downward to right for individuals. Increase in aggregate demand is an important factor because of change in the amount of money people save. Save less and spend more, increase in consumer spending would increase aggregate demand. Decrease in aggregate demand can be caused by higher taxes and lower transfer payments can also reduce aggregate spending.

5. Equilibrium – The American economy is influenced by equilibrium and is determined by the intersection of the aggregate supply and aggregate demand curves and is the level of real GDP consistent with a given price level. Equilibrium points out a dilemma facing economic policymakers. The economy must be allowed to grow to new levels of real GDP, but it must do so without increasing the price level, which causes inflation.

#7 Supply-Side Policies

-Economic policies designed to stimulate output and lower unemployment by increasing production in the economy are known as supply-side economics. Its views began to interest people because demand-side policies did not seem to be controlling the country's growing unemployment and inflation. It became the hallmark of President Regan's administration. The similarities of the policies are that they accept the multiplier and the accelerator and they have the same goal, which is increasing production and decreasing unemployment without increasing inflation. But in difference, supply-side economist believe that the role of government has increased to the point where individuals incentives to work, save, and invest are being destroyed, therefore they want the government to take a smaller role in economic affairs, while letting the free market play a larger role in the federal tax structure they believe that if the taxes are too high, people will not want to work, and business will not produce as much as they could. The main limitation of supply-side policies is a lack of enough experience with them to know how they affect the economy. Supply-side economic policies are designed more to restore economic instability. Supply-side policies during the Reagan presidency tended to weaken the automatic stabilizers by making the federal tax structure less progressive and by reducing many of the "safety net" programs.

#8 Monetary Policies

-A doctrine called monetarism places primary importance on the role of money and its growth. Both demand-side economics and supply-side economics are concerned about stimulating production and employment. They favor policies that lead to stable, long term monetary growth at levels low enough to control inflation. Reviewing the looks of monetary policies when the Federal Reserve System conducts monetary policy, it tries to affect cost and availability of credit by expanding and controlling the money supply. The main tools in this regard are open market operations, the discount rate, and a change in the reserve requirement. Interest rates and Inflation- In the short run, expansionist monetary policy can be used to lower interest rates. This action would shift the aggravate supply curve to the left. An overly expansionist monetary policy, then,, will cause long term inflation.

#9 Milton Friedman

An influential and conservative American economist closely associated with the school of thought known as monetarism. He taught at the University of Chicago from 1946-1977, and was affiliated with the National Bureau of Economic Research and wrote for Newsweek. Friedman's writings have covered an extradinary variety of topics, many of which were put forth in his early classic, Capitalism and Freedom written in 1962. His writings are the definitive work on the growth of the supply and its relationship to inflation and real changes in the economy. Her claims that the Federal Reserve System should let the money supply grow at a constant rate to avoid the economy.

Section 4 – Economics and Politics

J. Harp:

10. An Independent Monetary Authority

Monetary policy is the responsibility of the Fed. Monetary policy can operate at cross-purposes. If inflation is a problem, the Fed might want to follow a tight monetary policy to slow the growth of money and reduce inflation. This brings about high interest rates. Congress believes that the power to create money should be in the hands of an independent agency rather than in those of elected officials.

V. Haskins:

11. Why Economists Differ

Because economists have different backgrounds and experience, their advice can often seem contradictory. One reason for differences is that most economic explanations and theories are a product of the times. Demand-side economics came about during the 1930s when the unemployment rate was at record highs. The monetarist point soared. For the most part, economists generally do not define their position. Economists often take a middle road that incorporates many points of view.

A. Daniel, W Thomas

12. Why Economists Differ

In the 1800s the science of economics was k own as "political economics". After a while, however, the economists broke away from the political theorists and tried to establish economics as a science in its own right. In recent years the two fields have merged again.