* The federal government uses monetary and fiscal policies, or stabilization policies, to keep the economy healthy. The government uses methods and theories to avoid the two problems that destabilize the economy—unemployment and inflation. Unemployment can be classified as cyclical, structural, seasonal, or frictional. high unemployment is a sign that the economy is not well; on the contrary, low unemployment is a sign of a stable economy. Inflation is caused by excessive expansion of the money supply or government spending, according to the demand-pull theory. Section 2: The fiscal policy Approach to Stabilization
* The term fiscal policy refers to the federal government’s deliberate use of its taxation rates and expenditures to affect overall business activity. The Keynesian economists and the supply-side economists have two theories about how to obtain stabilization. Keynesian economists advocate the use of government spending to stimulate economic activity and reduce unemployment during recessions. A simple circular flow of income and output model is given. Supply-side economists advocate reductions in tax rates to stimulate private investment and employment. Section 3: Monetarism and the Economy
The Essay on Inflation and Government Economic Policies
Inflation is described as the process by which prices are continuously rising or the value of money continuously decreases (Consumer Price Index Frequently Asked Questions, 2013). As the definition explains, this is not something that would be desirable for the government or its citizens. For example, Germany during the 1920’s experienced a period of hyperinflation. Germans literally had to carry ...
* Monetarism is the theory that deals with the relationship between the amounts of money the Federal Reserve places in circulation and the level of activity in the national economy. Monetarists favor monetary policy rather than fiscal policy to stabilize the economy. Monetarists believe that the money supply should be increased at a steady rate of 3 to 5 percent per year for stable economic growth with low inflation. Monetarists believe that the main problem with fiscal policy is that it cannot be implemented effectively.
Vocabulary –
1. Unemployment rate – Percentage of the civilian labor force which is unemployed. A lagging indicator. 2. Full employment – The condition of a nation or state in which all citizens who want to work and are allowed to work are able to find employment 3. Underground economy – Illegal and unreported market transactions and productive activity that escape the watchful eyes of official record keepers. 4. Demand-pull inflation – Price increases which result from an excess of demand over supply. 5. Stagflation – High inflation and high unemployment occurring simultaneously. 6. Cost-push inflation – Sustained increase in price of goods and services, caused by the passing off increased production costs to the consumers by the producers.
7. Fiscal Policy – Government’s revenue and spending policy designed to counter economic cycles in order to achieve lower unemployment, achieve low or no inflation, and achieve sustained but controllable economic growth. 8. Monetarism – Economist who believes the money supply is the most important economic measure. 9. Monetary rule – money supply would be calculated by known macroeconomic and financial factors, targeting a specific level or range of inflation. 10. Time lags – an interval of time between two related phenomena (as a cause and its effect)
