1. Economics Chapter 17 Stabilizing the National Economy

2. Section 1: Unemployment and Inflation Stabilization Policies Stabilization Policies Monetary Policy- Interest rates, the fed policies Monetary Policy- Interest rates, the fed policies Fiscal Policy- How they spend tax dollars Fiscal Policy- How they spend tax dollars Unemployment rate- Percentage out of work and still seeking work Unemployment rate- Percentage out of work and still seeking work Not counted, retired, students, and long-term hospital Not counted, retired, students, and long-term hospital

3. Unemployment Reasons Reasons Cyclical Cyclical Structural Structural Seasonal Seasonal Frictional Frictional Full employment- unemployment around 5% Full employment- unemployment around 5% Underground Economy- unreported workers Underground Economy- unreported workers

4. Inflation Demand-Pull Theory- excessive business and consumer demand raises Prices. Demand-Pull Theory- excessive business and consumer demand raises Prices. Cost-Push inflation- Higher wages push up prices. Cost-Push inflation- Higher wages push up prices. Stagflation- Inflation plus low economic activity. Stagflation- Inflation plus low economic activity.

5. Section 2: The Fiscal Policy Approach to Stabilization Circular Flow of income and output- Income flowing between business and consumers. Circular Flow of income and output- Income flowing between business and consumers. Leakage- removal of money income, taxes and savings Leakage- removal of money income, taxes and savings Injections- business investment and government spending Injections- business investment and government spending

6. Fiscal Policy and Supply-side effects Producing jobs and cutting taxes as ways to stimulate the economy Producing jobs and cutting taxes as ways to stimulate the economy Supply-side effects- business tax credits for new capital equipment Supply-side effects- business tax credits for new capital equipment Bush used it in 2003 Bush used it in 2003 Maximum tax from 39.6% to 35% Maximum tax from 39.6% to 35%

7. Section 3: Monetarism and the Economy Amount of money in circulation and the amount of economic activity Amount of money in circulation and the amount of economic activity Milton Friedman Milton Friedman New money in the economy based on growth of GDP New money in the economy based on growth of GDP

8. Government Policy according to Monetarists Monetary rule- smooth consistent growth in money supply. Monetary rule- smooth consistent growth in money supply. Inflation Targeting- use policy to keep inflation at a steady rate. Inflation Targeting- use policy to keep inflation at a steady rate. Monetarist Theory and the Federal Reserve- Used in the 1980s Monetarist Theory and the Federal Reserve- Used in the 1980s

9. Monetarists’ Criticism of Fiscal Policy The political process- Too many groups involved in Fiscal Policy The political process- Too many groups involved in Fiscal Policy Time lags- How long it takes fiscal policy to work. Time lags- How long it takes fiscal policy to work.