1. Chapter 16 Macroeconomic Policies © 2001 South-Western College Publishing

2. 2 Expansionary Policies 4 Automatic Stabilizers –Forces within the economy that naturally tend to counteract recessions and inflation; ex., the Social Security system –Fiscal drag - slowing effect on the economy resulting from a budget surplus –Fiscal stimulus - activating effect on on the economy resulting from a budget deficit

3. 3 Expansionary Policies (cont.) 4 Monetary policy 4 Discretionary fiscal policy –Tax financing –Debt financing –Financing by creating money

4. 4 Expansionary Policies (cont.) 4 Methods of increasing government spending –Increase government spending and hold taxes –Hold government spending and decrease taxes (tax rebate plan) –Increase government spending and increase taxes proportionally

5. 5 Expansionary Policies (cont.) 4 Discretionary government spending –Transfer payments –Public works 4 Problems with discretionary spending –Difficult to end a government spending program –Problems balancing when the program is needed and when it can begin

6. 6 Expanding the Economy 4 The Great Depression 4 The New Deal 4 Expansionary Policies of the 1960s 4 Expansionary Policies of the 1970s-1990s –Recession of 1974-75 –Recessions of 1980 and 1982 –Recession of 1990-91

7. 7 Contractionary Policies 4 Inflation –persistent increase in the level of prices 4 Deflation –persistent decrease in the level of prices 4 Disinflation –a slowdown in the rate of inflation

8. 8 Types of Inflation 4 Demand-Pull Inflation: –occurs when the total demand for goods and services exceeds the available supply of goods and services in the short run 4 Cost-Push Inflation: –characterized by a spiral of wage and benefit cost increases and price increases 4 Stagflation: –inflation and high unemployment occurring at the same time

9. 9 Measures to Reduce Total Spending 4 Automatic Stabilizers 4 Monetary Policy 4 Other Measures 4 Government Surplus –Hold taxes and decrease spending –Increase taxes and hold or decrease spending –Decrease taxes and decrease spending 4 Borrowing

10. 10 Trade-Off Between Unemployment and Inflation 4 Phillips curve - a curve showing the relationship between unemployment and inflation 4 Hyperinflation - inflation that feeds on itself to go out of control, creating severe distortions in an economy and rendering its currency almost worthless

11. 11 Contracting the Economy 1960 65 1970 75 1980 85 1990 95 2000 14 12 10 8 6 4 2 0 Unemploymen t Inflation