Notebook # 26 - Economics 16-1
& 16-2
The Cost of
Economic Stability
Achieving Economic Stability
ESSENTIAL QUESTIONS:
• What is the purpose of the Federal
Reserve System?
• What are the structures of the Federal
Reserve System?
•What are the functions of the Federal
Reserve System?
Achieving Economic Stability
GPS STANDARDS:
SSEMA3- Explain how the government uses fiscal
policy to promote price stability, full employment, and
economic growth.
a.) Define Fiscal Policy
b.) Explain the government’s taxing and spending
decisions
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Achieving Economic Stability
• One of our nation’s most important goals is to
create an economic environment favorable to
growth and stability.
• Economic instability leads to social as well as
economic problems.
•Recession, high unemployment, and inflation
are forms of economic instability that hinder
long-term economic growth.
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Achieving Economic Stability
• Sometimes the economy experiences these
problems separately, and sometimes they
occur at the same time.
• In the early 1970s, for example, the economy
experienced stagflation–a period of stagnant
growth combined with inflation.
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Achieving Economic Stability:
The Misery Index
• The misery index is the sum of monthly
inflation and unemployment rates.
•Uncertainty increases when real GDP
declines.
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Achieving Economic Stability:
The Social Costs
• Economic instability results in wasted labor,
capital, and natural resources.
• Economic instability can lead to political
instability.
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Achieving Economic Stability:
The Social Costs
Economic instability is associated with:
1. increased crime
2. lower levels of policy protection and
municipal services
3. less willingness by companies to hire
disadvantaged people or provide on-the-job
training.
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Macroeconomic Equilibrium
• From a historical perspective, an excellent
economic state of affairs is relatively rare.
• Governments, businesses, and people would
like to see conditions of strong economic
growth prevail more often, but something
always seems to happen to prevent it.
• As a result, economists study markets in an
attempt to find out how they work, and how
they can be made to work even better.
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Macroeconomic Equilibrium
Aggregate
Supply
• The aggregate
supply curve
shows the amount
of real GDP that
could be produced
at various price
levels.
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Macroeconomic Equilibrium
• When costs fall, the
aggregate supply
curve shifts to the
right. (because with
lower production costs
more goods or
services can be
produced)
• When costs rise, the
aggregate supply
curve shifts to the left.
(because with higher
production costs fewer
goods and services
can be produced)
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Macroeconomic Equilibrium
• How did the fall in the cost of computers in
the last 20 years affect aggregate supply?
• It shifted the aggregate supply curve to the
right, increasing the supply of computers.
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Macroeconomic Equilibrium
Aggregate
Demand
• Aggregate demand
shows the quantity
of real GDP that
would be
purchased at
various price
levels.
Figure 16.4a
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Macroeconomic Equilibrium
Aggregate
Demand
• A decrease in savings,
expectations of a
strong economy, and
increase in transfer
payments financed
through deficit
spending, or a
reduction in taxes
shifts the aggregate
demand curve to the
right.
Figure 16.4b
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Macroeconomic Equilibrium
Aggregate
Demand
• An increase in savings,
expectations of a weak
economy, and
decrease in transfer
payments financed
through deficit
spending, or a
increase in taxes shifts
the aggregate demand
curve to the left.
Figure 16.4b
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Macroeconomic Equilibrium
• What would happen to aggregate demand if
average income in the United States rose?
• It would increase. When people earn more
income, they purchase more goods and
services.
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Macroeconomic Equilibrium
• Macroeconomic
equilibrium is
achieved when
aggregate supply
equals aggregate
demand curve.
• This would cause a
perfect economic
situation.
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Macroeconomic Equilibrium
• What happens when the economy is not in
equilibrium?
• If aggregate demand exceeds aggregate
supply, unemployment may fall and prices
may rise.
• If aggregate supply exceeds aggregate
demand, unemployment may rise and the
economy may contract.
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