1. Splash Screen

2. Chapter Menu Chapter Introduction Section 1:Section 1:Unemployment and Inflation Section 2:Section 2:The Fiscal Policy Approach to Stabilization Section 3:Section 3:Monetarism and the Economy Visual Summary

3. Chapter Intro 1 Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth.

4. Chapter Intro 2 In this chapter, read to learn about the factors that destabilize the economy and the actions that can be taken in response.

5. Chapter Preview-End

6. Section 1-Main Idea Section Preview In this section, you will learn why unemployment and inflation are two major threats to a nation’s economic stability.

7. Section 1-Key Terms stabilization policies unemployment rate full employment underground economy demand-pull inflation stagflation cost-push inflation Content Vocabulary

8. Section 1-Key Terms expert survey adapt Academic Vocabulary

9. A.A B.B C.C Section 1-Polling Question Is an unemployment rate of 5% acceptable? A.Yes B.No C.Not sure

10. Section 1 Measuring Unemployment Unemployment can be classified as cyclical, structural, seasonal, or frictional.

11. Section 1 Measuring Unemployment (cont.) The federal government uses stabilization policies to keep the economy healthy. stabilization policies The unemployment rate is one statistic that all economists look at.unemployment rate View: Measuring UnemploymentMeasuring Unemployment

12. Section 1 Many types of unemployment exist, so not all unemployment can or should be eliminated. Types of unemployment: Measuring Unemployment (cont.) –Cyclical –Structural –Seasonal –Frictional View: Reasons for UnemploymentReasons for Unemployment

13. Section 1 Economists generally consider the economy at full employment when the unemployment rate is around 5%.full employment Unemployment rates are an estimate; survey results are also imperfect because of the underground economy such as tax evaders and drug traffickers.underground economy Measuring Unemployment (cont.)

14. A.A B.B C.C D.D Section 1 Economists consider the economy at full employment when the unemployment rate is around what percent? A.2% B.5% C.7% D.10%

15. Section 1 Inflation Inflation is caused by excessive expansion of the money supply or government spending, according to the demand-pull theory.

16. Section 1 Inflation (cont.) Like the unemployment rate, inflation can be a major national problem. View: Two theories of InflationTwo theories of Inflation

17. Section 1 Two competing ideas have developed concerning inflation: –The demand-pull theorydemand-pull theory Inflation (cont.) Fed allows the money supply to grow too rapidly leading to higher demand and increased prices. Increases in government spending and business investment can increase demand. Aggregate demand can increase if taxes are reduced or consumers begin saving less.

18. Section 1 –The cost-push theorycost-push theory Unemployment can remain high during these periods of cost-push inflation. According to some economists, stagflation is a result of cost-push inflation.stagflation Inflation (cont.)

19. A.A B.B Section 1 Which theory do you think makes more sense and why? A.Demand-pull theory B.Cost-push theory

20. Section 1-End

21. Section 2-Main Idea Section Preview In this section, you will learn how government taxation and spending can be used to stimulate or slow the growth of the national economy.

22. Section 2-Key Terms fiscal policy circular flow of income and output Content Vocabulary

23. Section 2-Objectives remove offset Academic Vocabulary

24. A.A B.B C.C Section 2-Polling Question Should the government use deficit spending to stimulate the economy? A.Yes B.No C.Not sure

25. Section 2 The Circular Flow of Income and Output Keynesian economists advocate the use of government spending to stimulate economic activity and reduce unemployment during recessions.

26. Section 2 The Circular Flow of Income and Output (cont.) John Maynard Keynes developed fiscal policy theories during the Great Depression.fiscal policy He believed that government should step in to stimulate aggregate demand during a recession.

27. Section 2 The circular flow of income and output is important to the Keynesian theory.circular flow of income and output Monies that are removed or outside the circular flow of income, such as consumer savings, are referred to as leakage. The Circular Flow of Income and Output (cont.) View: Circular Flow of Income and OutputCircular Flow of Income and Output

28. Section 2 Injections of income into the economy, through business investment and government spending offset leakages. The Circular Flow of Income and Output (cont.)

29. A.A B.B Section 2 Is government taxation a leakage or injection? A.Leakage B.Injection

30. Section 2 Fiscal Policy and Supply-Side Effects Supply-side economists advocate reductions in tax rates to stimulate private investment and employment.

31. Section 2 Fiscal Policy and Supply-Side Effects (cont.) Ways to fight unemployment and stimulate the economy include: –Job programs –Cuts in federal taxes –Giving businesses tax credits on investments

32. Section 2 Supply-side effects are the result of tax cuts that lead to more work, savings and investments. Fiscal Policy and Supply-Side Effects (cont.)

33. A.A B.B C.C Section 2 Which action do you feel would work the best to stimulate the economy? A.Job programs B.Cuts in taxes C.Tax credit for businesses

34. Section 2-End

35. Section 3-Main Idea Section Preview In this section, you will learn about the theory that the control of the money supply by the Federal Reserve, rather than fiscal policy, should be used to stabilize the economy.

36. Section 3-Key Terms monetarism monetarists monetary rule inflation targeting time lags Content Vocabulary

37. Section 3-Objectives guideline target Academic Vocabulary

38. A.A B.B C.C Section 3-Polling Question Are you familiar with the term monetarism? A.Yes B.Somewhat C.Not at all

39. Section 3 The Theory of Monetarism Monetarists favor monetary policy rather than fiscal policy to stabilize the economy.

40. Section 3 The Theory of Monetarism (cont.) Many economists who do not favor fiscal policy as a way of stabilizing the economy believe monetary policy is the answer. Monetarists support the monetarism theory.Monetaristsmonetarism Monetarism is often linked with economist Milton Friedman.

41. Section 3 Monetarists believe that the Fed should increase the money supply at a smooth, given percent each year in order to avoid inflation. The Theory of Monetarism (cont.)

42. A.A B.B Section 3 Do you tend to agree more with a fiscal policy or a monetary policy? A.Fiscal policy B.Monetary policy

43. Section 3 Government Policy According to Monetarists Monetarists believe that the money supply should be increased at a steady rate of 3 to 5 percent each year for stable economic growth with low inflation.

44. Section 3 Government Policy According to Monetarists (cont.) Monetarists are opposed to using fiscal policy to stimulate or slow the economy. They believe: –The government should balance the federal budget. –The Fed should follow a monetary rule at a rate of 3 to 5 percent per year.monetary rule –Steady growth within strict guidelines is best way to stabilize the future economy.

45. Section 3 Some countries use inflation targeting to retain economic stability.inflation targeting Government Policy According to Monetarists (cont.) View: Changing Fed PoliciesChanging Fed Policies

46. A.A B.B C.C D.D Section 3 According the monetarists, the money supply should grow at which rate per year? A.10–15% B.6–8% C.5–9% D.3–5%

47. Section 3 Monetarists’ Criticism of Fiscal Policy Monetarists believe that the main problem with fiscal policy is that it cannot be implemented effectively.

48. Section 3 Monetarists’ Criticism of Fiscal Policy (cont.) Monetarists believe that the theory of fiscal policy seldom matches reality for two main reasons: –No single government body designs and implements fiscal policy. –There are various time lags between when it is enacted and when it becomes effective.time lags View: Implementing Fiscal PolicyImplementing Fiscal Policy

49. A.A B.B C.C D.D Section 3 Do you agree or disagree with the monetarists’ view of fiscal policy? A.Strongly disagree B.Mildly disagree C.Mildly agree D.Strongly agree

50. Section 3-End

51. VS 1 One of the major goals in stabilizing the national economy is maintaining a low unemployment rate. Economists classify unemployment as one of four types.

52. VS 2 According to the demand-pull theory of inflation, prices rise as the result of high demand. The cost-push theory states that high wages push up prices.

53. VS 3 Most economists subscribe to one of two theories on the best way to stabilize the economy.

54. VS-End

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61. Concept Trans Menu Economic Concepts Transparencies Transparency 16Unemployment Transparency 17Inflation & Deflation Transparency 19Fiscal Policy Select a transparency to view.

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64. Concept Trans 3

65. DFS Trans 1

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67. DFS Trans 3

68. Vocab1 stabilization policies: attempts by the federal government to keep the economy healthy; includes monetary and fiscal policies

69. Vocab2 unemployment rate: percentage of the civilian labor force that is unemployed but is actively looking for work

70. Vocab3 full employment: condition of the economy when the unemployment rate is lower than a certain percentage established by economists’ studies

71. Vocab4 underground economy: transactions by people who do not follow federal and state laws with respect to reporting earnings

72. Vocab5 demand-pull inflation: theory that prices rise as the result of excessive business and consumer demand; demand increases faster than total supply, resulting in shortages that lead to higher prices

73. Vocab6 stagflation: combination of inflation and stagnation (low economic activity)

74. Vocab7 cost-push inflation: theory that higher wages push up prices

75. Vocab8 fiscal policy: federal government’s use of taxation and spending policies to affect overall business activity

76. Vocab9 circular flow of income and output: economic model that pictures income as flowing continuously between businesses and consumers

77. Vocab10 monetarism: theory that deals with the relationship between the amount of money the Fed places in circulation and the level of activity in the economy

78. Vocab11 monetarists: supporters of the theory of monetarism, often associated with Milton Friedman

79. Vocab12 monetary rule: monetarists’ belief that the Fed should allow the money supply to grow at a smooth, consistent rate per year and not use monetary policy to stimulate or slow the economy

80. Vocab13 inflation targeting: a possible central bank policy in which the head of the central bank is given a specified annual rate of inflation as a goal

81. Vocab14 time lags: periods between the time fiscal policy is enacted and the time it becomes effective

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