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1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil
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2 Chapter 23 Fiscal Policy: Coping with Inflation and Unemployment 1/14/2016 © ©1999 South-Western College Publishing
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3 This chapter discusses principles associated with Fiscal Policy Options The Balanced Budget Multiplier © ©1999 South-Western College Publishing The Tax Multiplier Recessionary and Inflationary Gaps Winners and Losers from Inflation The Natural Rate of Unemployment Discouraged and Underemployed Workers Frictional, Structural, and Cyclical Unemployment
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4 What is the purpose of this chapter? To discuss why the economy can be in equilibrium and at the same time still be unable to provide full employment © ©1999 South-Western College Publishing
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5 Who is unemployed? Anyone who is at least 16 years of age and is actively seeking employment © ©1999 South-Western College Publishing
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6 Who makes up the Labor Force? All non-institutionalized people 16 years of age and older who are either working or actively looking for work © ©1999 South-Western College Publishing
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7 What is the Unemployment rate? The number of unemployed people expressed as a percentage of the labor force © ©1999 South-Western College Publishing
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8 How do we measure unemployment? The number of unemployed divided by the labor force © ©1999 South-Western College Publishing
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9 Who measures unemployment? The Bureau of Labor Statistics surveys about 60,000 households each month © ©1999 South-Western College Publishing
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10 For current data on unemployment: http://stats.bls.gov/eag.table.html http://stats.bls.gov/cpshome.htm © ©1999 South-Western College Publishing
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11 Who is a Discouraged Worker? A person who drops out of the work force because he cannot find a job © ©1999 South-Western College Publishing
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12 Are Discouraged Workers counted in the labor force? No! People who have quit looking for work are not counted as part of the labor force © ©1999 South-Western College Publishing
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13 What about part- time workers? Part time workers are counted as fully employed © ©1999 South-Western College Publishing
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14 What about people who are over-qualified for their jobs? They are still considered fully employed © ©1999 South-Western College Publishing
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15 Can the unemployment rate increase without anyone losing a job? If more people enter the work force than the number of new jobs generated, the unemployment rate increases © ©1999 South-Western College Publishing
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16 Have more women entered the work force? Since the 1950’s there has been a large increase in the number of women in the work force © ©1999 South-Western College Publishing
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17 What percentage of the work force today is female? Almost half
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18 Is the unemployment rate valid? Yes! As long as we are consistent, we can get an accurate comparison from one time period to the next © ©1999 South-Western College Publishing
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19 What is considered Full Employment? An employment level at which the actual rate of employment is equal to the natural rate of unemployment © ©1999 South-Western College Publishing
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20 What is considered Full Employment? About 3.5% unemployment is considered full employment © ©1999 South-Western College Publishing
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21 Why 3.5%? Because even in the best of times some people will always be looking for work © ©1999 South-Western College Publishing
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22 Which people will be looking for work even in the best of times? Recent school grads Those seeking job advancement Victims of downsizing Those in weak fields/markets © ©1999 South-Western College Publishing
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23 What was the unemployment rate during the worst of the Great Depression? In 1933, 25% of the labor force was unemployed © ©1999 South-Western College Publishing
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24 What are different types of unemployment? Frictional Structural Cyclical Seasonal © ©1999 South-Western College Publishing
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25 Will an increase in Aggregate Demand bring about more employment? That all depends It depends on where the aggregate demand curve is on the aggregate supply curve © ©1999 South-Western College Publishing
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26 Aggregate Supply Curve S d1 d2 d3 d4 d5 P Q 26 d6 © ©1999 South-Western College Publishing
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27 What is Inflation? The general upward movement in the average level of prices © ©1999 South-Western College Publishing
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28 What is Deflation? The general decrease in the average level of prices © ©1999 South-Western College Publishing
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29 What is the Consumer Price Index (CPI)? A measure of the cost of a fixed “market basket” of consumer goods and services © ©1999 South-Western College Publishing
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30 Does the makeup of the CPI change? As people’s tastes and preferences change, what goes into the basket will change © ©1999 South-Western College Publishing
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31 Who measures inflation? The Bureau of Labor Statistics © ©1999 South-Western College Publishing
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32 For current data on inflation: http://stats.bls.gov/cpshome.htm © ©1999 South-Western College Publishing
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33 Who loses from Inflation? Anyone living on a relatively fixed income © ©1999 South-Western College Publishing
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34 Do Savers lose from inflation? If the inflation rate is greater than the interest rate they earn on their money, they lose © ©1999 South-Western College Publishing
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35 Who gains from Inflation? Borrowers can gain if the inflation rate is greater than the interest they pay for the borrowed money © ©1999 South-Western College Publishing
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36 What is a Recessionary Gap? The amount by which aggregate expenditure falls short of a full employment equilibrium © ©1999 South-Western College Publishing
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37 The Recessionary Gap C 1 +I 1 +G 1 +(x-m) 1 45 o less than full employment C 2 +I 2 +G 2 +(x-m) 2 full employment 37 Aggregate Expenditure Real GDP (income) © ©1999 South-Western College Publishing
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38 What is an Inflationary Gap? The amount by which aggregate expenditure exceeds the full employment equilibrium © ©1999 South-Western College Publishing
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39 The Inflationary Gap C 1 +I 1 +G 1 +(x-m) 1 45 o full employment C 2 +I 2 +G 2 +(x-m) 2 new equilibrium 39 Aggregate Expenditure Real GDP (income) © ©1999 South-Western College Publishing
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40 What is a Fiscal Policy? Government spending and taxation to achieve full employment without inflation © ©1999 South-Western College Publishing
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41 What can we do about Recessionary & Inflationary Gaps? The government can intervene with Fiscal Policies to raise or lower aggregate expenditure © ©1999 South-Western College Publishing
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42 Why are Fiscal Policies to stem a Recessionary Gap not problem free? Spending becomes permanent Can be disruptive It can be very expensive © ©1999 South-Western College Publishing
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43 Why are Fiscal Policies to stem an Inflationary Gap not problem free? To cut government spending can be politically unpopular © ©1999 South-Western College Publishing
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44 For information on government spending: http://www.access.gpo.gov/su_docs /budget/index.html http://www.cato.org http://www.publicdebt.treas.gov http://www.concordcoalition.org © ©1999 South-Western College Publishing
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45 What is a Balanced Budget? Government spending equals tax revenues © ©1999 South-Western College Publishing
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46 What is the Balanced Budget Multiplier? When the government increases spending by a dollar and increases taxes by a dollar, aggregate expenditure increases © ©1999 South-Western College Publishing
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47 How does the Balanced Budget Multiplier work? When citizens have a dollar, they will save a part of it; when the government has a dollar, it spends all of it © ©1999 South-Western College Publishing
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48 48 © ©1999 South-Western College Publishing Balanced Budget Multiplier 1 1 - MPC + - MPC 1 - MPC
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49 What does the Balanced Budget Multiplier always equal? ONE © ©1999 South-Western College Publishing
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50 What is a Budget Deficit? Government spending exceeds tax revenues © ©1999 South-Western College Publishing
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51 What is a Budget Surplus? Tax revenues exceed government spending © ©1999 South-Western College Publishing
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52 Who is unemployed? Who makes up the labor force? Can the unemployment rate increase without anyone losing a job?Can the unemployment rate increase without anyone losing a job? What is Full Employment? Which people will be looking for work even in the best of times?Which people will be looking for work even in the best of times? What is Inflation?
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53 Who loses from Inflation? Who gains from Inflation? What is a Recessionary Gap? What is an Inflationary Gap? What is a Fiscal Policy? What is a Balanced Budget? What is the Balanced Budget Multiplier? What is a Budget Deficit? What is a Budget Surplus?
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54 ENDEND © ©1999 South-Western College Publishing
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