 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

 The Employment Act of 1946  Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act)

 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

 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.

 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

 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

 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