Chapter 17Stabilizing the National Economy

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Section 1: Unemployment and Inflation

In order to make the future more predictable for planning, saving, and investing, the government uses stabilization policies: monetary and fiscal policy

Unemployment Causes uncertainty in the economy The unemployment rate is the percentage

of the civilian labor force that is without jobs but actively looking for work

Unemployment means a waste of human resources government works to keep unemployment rate low

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4 Types of Unemployment Cyclical Structural Seasonal Frictional

Cyclical Unemployment Associated with the ups and downs of the

business cycle

Structural Unemployment Caused by changes in the makeup of the

economy (new technology) Ex: workers replaced by computers or

machines Affects less skilled workers the hardest

Seasonal Unemployment Caused by changes in weather Affects mostly construction workers and

farmers

Frictional Unemployment Temporary unemployment between jobs Will always exist

Full Employment Economists today have come to consider

the economy to be at full employment when the unemployment rate is less than 5%.

Unemployment is difficult to measure accurately because of the underground economy.

Inflation A major obstacle to economic stability People have come to expect prices to rise

about 3% a year, but unpredictable inflation can destabilize the economy

May affect interest rates and standard of living

2 Kinds of Inflation Demand-Pull Inflation Cost-Push Inflation

Name some factors that could cause the price of each of the following to go up:

Oil, medical care, orange juice, automobiles

Demand Pull Inflation Theory that prices rise as a result of

excessive business and consumer demand; demand increases faster than total supply, resulting in shortages that lead to higher prices

Can result from loose-money policy, tax reduction, natural disaster, or holidays

Cost-Push Inflation Demand-pull theory assumes that increased

demand will increase output and reduce unemployment, but rising prices and rising unemployment can happen at the same time Cost-Push Theory

Theory that higher wages and profits push up prices

Can result in stagflation, a combination of inflation and low economic activity