Presentation Plus! Economics: Today and Tomorrow
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CHAPTER FOCUS
SECTION 1 Unemployment and
Inflation
SECTION 2 The Fiscal Policy Approach
to Stabilization
SECTION 3 Monetarism and the
Economy
CHAPTER SUMMARY
CHAPTER ASSESSMENT
3
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Why It’s Important
Why is it important for the economy to be
balanced, or stabilized? This chapter will
explain the factors that destabilize the
economy and what actions are taken to
adjust it.
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listen to Why It’s Important.
4
Chapter Overview
Chapter 17 discusses the causes and
effects of unemployment and inflation,
and explores the fiscal and monetary
policies used by the government to
stabilize the economy.
5
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Reader’s Guide
Section Overview
Section 1 describes or explains measures of
unemployment, types of unemployment, and the
demand-pull and cost-push theories of inflation. 
Objectives
– What are two problems the government faces
in measuring unemployment? 
– What are the four kinds of unemployment? 
– How does demand-pull inflation differ from
cost-push inflation?
7
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information. Section 1 begins on page 451 of your textbook.
Reader’s Guide (cont.)
Terms to Know
– stabilization policies 
– unemployment rate 
– full employment 
– underground economy 
– demand-pull inflation 
– stagflation 
– cost-push inflation
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listen to the Cover Story.
8
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information. Section 1 begins on page 451 of your textbook.
Introduction
• When people are unemployed, they
experience uncertainty. In the same way
unemployment in general causes
uncertainty in the American economy. 
• To keep the economy healthy and to
make the future more predictable for
planning, saving, and investing, the
federal government uses monetary and
fiscal policies.
9
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Introduction
• Together these are called stabilization
policies. 
• In this section, you’ll learn that two of the
biggest threats to a nation’s economic
stability are high unemployment and
inflation.
stabilization policies
attempts by the federal
government to keep the
10
economy healthy; includes
monetary and fiscal policies
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Lecture Launcher
• Brazil has had high inflationary periods
throughout its history. In mid-1994, its
monthly inflation reached 50 percent. In
2000, inflation was at 6%. 
• In the United States what is considered
an acceptable level of inflation? 
• Why are inflation and unemployment
important to a nation’s stability?
11
Measuring Unemployment
• The unemployment rate is the
percentage of the civilian labor force that
is without jobs but that is actively looking
for work. 
• High unemployment is a sign that the
economy is not doing well. 
• Types of unemployment: cyclical,
structural, seasonal, and frictional.
12
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Measuring Unemployment
• Full employment is when the
unemployment rate is below 5 percent. 
• The underground economy, consisting of
people who do not follow federal and state
laws with respect to reporting earnings,
makes it difficult to measure true
unemployment rates.
13
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Measuring Unemployment (cont.)
Figure 17.1
The Unemployment Rate
Discussion Question
Why can’t all unemployment be
eliminated?
Structural, seasonal, and frictional
unemployment will always exist.
15
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Inflation
• Acceptable levels of inflation are about 3
percent a year or lower. 
• Unpredictable inflation has a destabilizing
effect on the economy. 
• Inflation can cause people’s standard of
living to fall, especially people on fixed
incomes, such as retired people.
16
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Inflation (cont.)
• Demand-pull theory of inflation states that
prices rise because of high business and
consumer demand. 
• Cost-push theory of inflation states that
prices rise because of excessive labor
costs and business profits. 
• Stagflation occurs when high inflation and
unemployment occur at the same time.
17
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Discussion Question
Do you think inflation above 3
percent can ever be a positive
indicator of the economy?
Why?
Possible responses: Yes, because the
inflation could be due to high demand,
which is good for the economy, and
might not continue rising much above 3
percent. No, because any inflation
levels above 3 percent lead to a
decreased standard of living.
18
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Section Assessment
What are two problems the
government faces in measuring
unemployment?
Problems include that statisticians
can’t interview every person in and out
of the labor force and the existence of
an underground economy.
19
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Section Assessment (cont.)
How does demand-pull inflation
differ from cost-push inflation?
Demand-pull inflation results when
demand increases faster than total
supply. Cost-push inflation results
when excessive wage demands of
large unions and excessive profit
motive of large corporations push
up prices.
20
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Section Assessment (cont.)
Understanding Cause and Effect
Construct a table that identifies the
causes of inflation. List four causes
under demand-pull inflation in column 1
and three causes under cost-push
inflation in column 2.
Demand-pull causes: rapid increased in
the money supply; increased government
spending and business investment for
expansion; reductions in taxes;
reductions in consumer saving. Costpush causes: high production costs; wage
demands of large unions; excessive profit
motive of large corporations.
21
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Section Close
Identify some of the ways in which
high unemployment and high
inflation affect the economy.
22
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Reader’s Guide
Section Overview
Section 2 outlines a simple model of how income
flows between businesses and consumers and
discusses how Keynesian fiscal policy might be
used to control unemployment and inflation. 
Objectives
– How does income flow between businesses
and consumers? 
– How can the federal government use fiscal
policy to combat unemployment?
24
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information. Section 2 begins on page 457 of your textbook.
Reader’s Guide (cont.)
Terms to Know
– fiscal policy 
– circular flow of income
Click the Speaker button to
listen to the Cover Story.
25
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information. Section 2 begins on page 457 of your textbook.
Introduction
• Most economists belong to one of two
groups on the question of stabilization. 
• One group emphasizes the role of the
Federal Reserve in stabilizing the
economy.
26
Introduction (cont.)
• In this section, you’ll learn that the other
group concentrates more on the use of
fiscal policy, the federal government’s
deliberate use of its taxation rates and
expenditures to affect overall business
activity.
fiscal policy
federal government’s use of
taxation and spending
policies to affect overall
business activity
27
Lecture Launcher
• During the Great Depression the U.S.
government funded programs that gave
people jobs. One program hired writers
to interview people about their lives.
Today, these works give first-hand
accounts of life in the U.S. from just
after the Civil War through the Great
Depression. 
• Why is this kind of spending an example
of fiscal policy? 
• What is the ultimate goal of fiscal
policy?
28
John Maynard Keynes
• John Maynard Keynes believed that the
forces of aggregate supply and demand
operated too slowly in a serious
recession and that government should
step in to stimulate aggregate demand.
29
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Discussion Question
Summarize the economic theory of
John Maynard Keynes.
Answers will vary, but should include
the idea that in a serious recession
the government should use fiscal
policy measures to stimulate
aggregate demand.
30
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The Circular Flow of Income
• Income flows from business to
households in form of wages, rent,
interest, and profits. 
• Income then flows back to businesses in
form of payments for consumer goods
and services. 
• Leakages refer to money removed from
the economy through consumer saving
and government taxation. 
• Injections are used to offset leakages by
“injecting” income that could have been
used to purchase goods and services or
could have been used by businesses.
31
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The Circular Flow of Income (cont.)
• Leakages reduce aggregate demand by
removing income that could have been
used to purchase goods and services or
could have been used by businesses. 
• Injections increase aggregate demand by
placing more money in the hands of
consumers and businesses. 
• Leakages and injections should balance
each other out, but if leakages outweigh
injections, aggregate demand decreases
and unemployment follows, or if injections
outweigh leakages, aggregate demand
increases and inflation follows.
32
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The Circular Flow of Income (cont.)
Figure 17.4
The Circular Flow
of Income
Government occupies a
central position in the
circular flow of income. By
using fiscal policy, the
federal government
partially controls the levels
of leakages and injections.
This, in turn, may control
the overall level of
economic activity.
Discussion Question
Many Americans do not contribute
to savings accounts on a regular
basis. How would the economy be
affected if a large number of people
suddenly began to save?
Leakages would outweigh injections
and aggregate demand would
decrease, leading to unemployment,
until the economy was able to reach
a new balance of injections.
34
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Fiscal Policy and Unemployment
• Keynesian economists believe the Great
Depression was caused by a high level
of leakages. 
• They think the government should have
increased injections of government
spending or cut taxes. 
• While the government did create many job
programs in the 1930’s, these were not
enough to make up for decrease in
consumer demand.
35
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Discussion Question
How might cutting taxes have
helped to alleviate the depression?
36
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Discussion Question
If businesses paid less in taxes they
would have more money to invest in
new products, expanding their
business and hiring more workers.
These newly employed people would
be able to buy products, thus feeding
more income into the economy. If
people paid less in taxes they would
buy more products, again causing
businesses to have more revenue to
spend on workers and expansion.
37
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Fiscal Policy and Supply-Side Effects
• Supporters of fiscal policy believe that
tax cuts lead to increasing investment
and jobs. 
• If people pay lower taxes, they will have
more money to spend, save, and invest in
a growing economy. 
• These are called supply-side effects of
fiscal policy.
38
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Discussion Question
Why do tax cuts stimulate economic
growth?
When businesses and individuals
have more cash, those businesses
and individuals spend and invest
more. Thus, production increases
and the economy expands.
39
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Section Assessment
How can the federal government
use fiscal policy to combat
unemployment?
The government might combat
unemployment by creating new jobs
programs or by cutting taxes. Both
approaches are designed to stimulate
the economy and, by doing so,
reduce unemployment.
40
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Section Assessment (cont.)
Fiscal Policy Explain how the
government policy of increasing
federal, state, or local taxes could
eventually lower inflation.
If people are paying higher taxes,
they have less income available to
make purchases. As purchases
decline, businesses will cut back on
production and reduce prices.
41
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Section Assessment (cont.)
Evaluating Primary and Secondary
Sources Research the Depressionera writings of Studs Terkel and
photographs of Dorothea Lange.
Write a report describing the
economic conditions of the early
1930s and what actions you think
the government should have taken
to ease the crisis.
Answers will vary.
42
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Section Close
Discuss the kinds of policies
Keynesian economists might
suggest for the present economic
situation in the United States.
43
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Reader’s Guide
Section Overview
Section 3 explains the theory of monetarism,
discusses the monetarist approach to
government policy, and reviews monetarist
criticisms of fiscal policy. 
Objectives
– What do monetarists think the government and
the Fed should do to stabilize the economy? 
– Why do monetarists criticize fiscal policy?
45
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Reader’s Guide (cont.)
Terms to Know
– monetarism 
– monetarists 
– monetary rule 
– time lags
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listen to the Cover Story.
46
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information. Section 3 begins on page 462 of your textbook.
Introduction
• In this section, you’ll learn about
monetarism, the theory that deals with
the relationship between the amount of
money the Federal Reserve places in
circulation and the level of activity in the
economy. 
• The supporters of this theory are
called monetarists.
monetarism
theory that deals with the
relationship between the
amount of money the Fed
places in circulation an the
level of activity in the economy
47
monetarists
supporters of the
theory of monetarism,
often linked with Milton
Friedman
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Lecture Launcher
• Is e-money a friend or foe to
monetarism? For most of the century the
Federal Reserve has had a monopoly of
hard currency. But, in principle, e-money
could one day replace Federal Reserve
Notes and fully privatize the money
stock. 
• Will self-regulating e-money provide a
new and improved alternative to centralbank discretionary powers?
48
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Lecture Launcher (cont.)
• With $100 billion of Federal Reserve
notes in circulation, monetarists still have
a long time to evaluate this question and
devise new methods for controlling the
money supply. 
• What is monetarism and what is the
ultimate goal of monetarist policy?
49
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The Theory of Monetarism
• States that the Fed should increase the
money supply at a smooth, given percent
per year. 
• If the economy operates below capacity,
the extra demand that results from the
increase in the money supply will lead to a
rise in output. 
• Businesses will hire more workers and
unemployment will decrease. 
• If there is full employment, however, the
increased demand will lead to inflation.
50
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Discussion Question
Do you think the theory of
monetarism is sound?
Answers will vary, but students
should demonstrate an
understanding of the theory and its
applications for the economy.
51
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Government Policy According
to Monetarists
• Monetarists oppose using fiscal policy as a
way to control the economy because the
economy is so complex and so little
understood. 
• The want the government to balance the
federal budget, so that the government
would not be competing with businesses
for loans. 
• They want the Fed to stop smoothing the
ups and downs in the economy.
52
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Government Policy According
to Monetarists (cont.)
• They want the Fed to allow the money
supply to grow at a steady rate. 
• Monetarist theory actually influenced the
Fed’s policies during the 1980s.
53
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Discussion Question
Do you agree that the Fed should
allow the money supply to grow at a
steady rate that has been
predetermined?
Why or why not?
54
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Discussion Question
Possible response: I agree because
this would help the economy to grow
at a steady rate. I disagree because
the economy may not always grow at
the same rate, sometimes the money
supply will be increased too much
and other times it will not be
increased enough.
55
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Monetarists’ Criticism of
Fiscal Policy
• The theory of fiscal policy is not the
reality. 
• No single government body designs and
implements fiscal policy. 
• Since there are differences of opinion
about what fiscal policy to institute, no
single policy is actually enacted.
56
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Monetarists’ Criticism of
Fiscal Policy (cont.)
• There is a time lag between when a policy
is enacted and when it is finally
implemented. 
• If the policy is implemented too late, then
it has the opposite affect.
57
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Monetarists’ Criticism of
Fiscal Policy (cont.)
Figure 17.6
Changing
Monetary
Policies of
the Fed
Discussion Question
Which criticism of fiscal policy do
you think is the greatest factor in
government’s inability to efficiently
control the economy?
Explain your choice.
Answers will vary. Student
explanations should show they
understand how the government
decided upon and implements its
fiscal policy.
59
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Discussion Question
Do you agree that the Fed should
allow the money supply to grow at a
steady rate that has been
predetermined?
Why or why not?
60
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Section Assessment
Possible response: I agree because
this would help the economy to grow
at a steady rate. I disagree because
the economy may not always grow at
the same rate, sometimes the money
supply will be increased too much
and other times it will not be
increased enough.
61
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Section Assessment (cont.)
Monetarism Do you agree or
disagree with the theory of
monetarism? Explain your
response.
Answers will vary.
62
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Section Assessment (cont.)
Making Comparisons Describe in
your own words the difference
between monetarism and monetary
policy. Share your description with
a classmate, making sure he or she
understands the difference.
Monetarism is the theory that deals with
the relationship between the amount of
money in circulation and economic
activity, whereas monetary policy is the
action taken by the Fed to increase or
decrease the money supply.
63
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Section Close
Debate which you think is more
effective in stabilizing the
economy–fiscal policy or monetary
policy.
64
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Section 1: Unemployment and
Inflation
• Two of the biggest threats to the nation’s
economic stability are high unemployment
and inflation. 
• Maintaining a low unemployment rate is a
goal of stabilization policies. 
• The four types of unemployment are cyclical,
structural, seasonal, and frictional. 
• According to the theory of demand-pull
inflation, prices rise because excessive
business and consumer demand increase
faster than total supply.
66
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Section 1: Unemployment and
Inflation (cont.)
• The theory of cost-push inflation states that
the wage demands of labor unions and the
excessive profit motive of large corporations
push up prices.
67
Section 2: The Fiscal Policy
Approach to Stabilization
• Some economists believe economic
stabilization can be met with fiscal policy–
the federal government’s deliberate use of
taxation and spending to affect overall
business activity. 
• John Maynard Keynes developed fiscal policy
theories during the Great Depression. 
• Keynesian theory states that leakages out of
and injections into the circular flow of income
affect aggregate demand and should be
counteracted by government taxing and
spending policies.
68
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Section 2: The Fiscal Policy
Approach to Stabilization (cont.)
• To bring down unemployment, Keynesian
economists believe in forming governmentsponsored jobs programs and cutting federal
taxes.
69
Section 3: Monetarism and the
Economy
• Monetarists believe in using the growth
rate of the money supply to stabilize the
economy. 
• The theory of monetarism is often linked with
economist Milton Friedman. 
• Friedman and his supporters believe that the
Fed should follow a monetary rule by
increasing the money supply at a smooth,
given percentage per year.
70
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Section 3: Monetarism and the
Economy (cont.)
• Monetarists criticize fiscal policy because
of the political arena in which it is
developed, and because time lags
between enactment and implementation of
fiscal policies may worsen the situation.
71
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Recalling Facts and Ideas
What are the four types of
unemployment?
cyclical, structural, seasonal, frictional
73
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Recalling Facts and Ideas (cont.)
What causes demand-pull inflation?
excessive business and consumer
demand
74
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Recalling Facts and Ideas (cont.)
What causes cost-push inflation?
workers’ excessive wage demands
and excessive profit motive of large
corporations
75
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Recalling Facts and Ideas (cont.)
What are the leakages out of the
circular flow of income?
consumer saving, government
taxation
76
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to display the answer.
Recalling Facts and Ideas (cont.)
What are the injections of income
into the circular flow of income?
business investment, government
spending
77
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Recalling Facts and Ideas (cont.)
What do Keynesian economists
think the federal government should
do to reduce unemployment?
increase government spending and
cut taxes
78
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to display the answer.
Recalling Facts and Ideas (cont.)
Who is the economist most often
linked to monetarism?
Milton Friedman
79
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Recalling Facts and Ideas (cont.)
What do monetarists believe the Fed
should do in terms of monetary
policy?
Follow the monetary rule and allow
the money supply to grow at a
constant rate of between 3 and 5
percent each year.
80
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Thinking Critically
Making Generalizations Analyze why
full employment cannot be defined
as zero unemployment.
Unemployment will always occur
because people lose their jobs, leave
jobs to further their education, or
change jobs. Also, some people work
at jobs that are seasonal in nature.
Further, technological developments
may make certain jobs redundant,
leaving some workers unemployed.
81
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Thinking Critically (cont.)
Understanding Cause and Effect
Create a diagram like the one on
page 468 of your textbook to explain
why the unemployment rate might
rise if fiscal policy were used to
combat inflation.
Answers will vary.
82
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Reviewing Skills
Summarizing Information Read the
excerpt on page 469 of your textbook,
then answer the questions that follow.
83
Reviewing Skills (cont.)
According to the article, what should
happen when there is a shortage of
workers?
A shortage of workers leads to higher
wages. This, in turn, triggers inflation,
which leads to higher interest rates. As
a result, the economy slows and the
demand for labor eases.
84
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Reviewing Skills (cont.)
Summarize what the article states
about the economy.
Summaries will vary but should note
that the usual economic result of labor
shortages has not developed.
85
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What fiscal policies might be
enacted to deal with unemployment?
Fiscal policies would include increased
government spending and tax cuts to
stimulate the economy.
86
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Click the mouse button to return to the Contents slide.
Continued on next slide.
Continued on next slide.
Continued on next slide.
Scales represent the economy. A condition called
inflation can upset the economic stability.
Unemployment too can cause the economy to
become unstable. In this chapter you will learn
about different approaches to maintain economic
stability.
Click the mouse button to return to the Contents slide.
Explore online information about the
topics introduced in this chapter.
Click on the Connect button to launch your browser and go to the
Economics: Today and Tomorrow Web site. At this site, you will find
interactive activities, current events information, and Web sites
correlated with the chapters and units in the textbook. When you
finish exploring, exit the browser program to return to this
presentation. If you experience difficulty connecting to the Web site,
manually launch your Web browser and go to
http://glencoe.com/sec/socialstudies/economics/econtoday2005/
index.php
Explore online information about the
topics introduced in this chapter.
Click on the Connect button to launch your browser and go to the
BusinessWeek Web site. At this site, you will find up-to-date
information dealing with all aspects of economics. When you
finish exploring, exit the browser program to return to this
presentation. If you experience difficulty connecting to the Web
site, manually launch your Web browser and go to
http://www.businessweek.com
Your Next Job
To find up-to-date news and analysis on the
economy, business, technology, markets,
entrepreneurs, investments, and finance, search
feature articles and special reports on the
Business Week web site.
www.businessweek.com
Continued on next slide.
This feature is found on page 456 of your textbook.
Your Next Job
According to the article, why are
workers so confident about their
jobs?
because there was a jobs boom
throughout the 1990s
Continued on next slide.
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answer. This feature is found on page 456 of your textbook.
Your Next Job
How have the new styles of
employment changed what is
demanded of workers?
In the past, expertise in a single discipline
was enough to guarantee a successful
future. Now, workers must have skills in
several areas.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 456 of your textbook.
Economics and You
Video 23: Economic Growth
and Stability
After viewing Economic Growth and Stability,
you should be able to… 
• compare and contrast boom and bust
situations in the business cycle. 
• compare demand-side and supply-side
economic theories.
Continued on next slide.
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to display the information.
Economics and You
Video 23: Economic Growth
and Stability
Disc 1, Side 2
Chapter 23
Click the Videodisc button
anytime throughout this
section to play the complete
video if you have a videodisc
player attached to your
computer.
Click the Forward button to
view the discussion questions
and other related slides.
Click inside this box to play the preview.
Continued on next slide.
Economics and You
Video 23: Economic Growth
and Stability
Why is unemployment considered a
barometer of the economy?
because unemployment
tends to rise during
recessions and drop during
periods of expansion
Disc 1, Side 2
Chapter 23
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to display the answer.
Summarizing Information
Have you ever read something and just a
short time later forgotten what it was all
about? Summarizing information–reducing
many sentences to just a few well-chosen
phrases–helps you remember the main ideas
and important facts contained in a longer
reading selection.
Continued on next slide.
This feature is found on page 461 of your textbook.
Summarizing Information
Learning the Skill
To learn how to summarize information,
follow the guidelines listed below: 
– Your summary should be much shorter than
the reading selection. 
– Your summary should contain the main ideas
of the reading selection.
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information. This feature is found on page 461 of your textbook.
Summarizing Information
Learning the Skill (cont.)
– Your summary should not contain your opinion.
It should contain only the opinion of the person
who wrote the selection. 
– Your summary sentences and phrases should
not be copied word for word from the selection.
Write a summary in your own words to be sure
that you understand the main ideas of the
selection.
Continued on next slide.
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information. This feature is found on page 461 of your textbook.
Summarizing Information
Practicing the Skill
• Read the paragraph on page 461 of your
textbook, then answer the questions that follow.
Continued on next slide.
This feature is found on page 461 of your textbook.
Summarizing Information
What is the main idea of this
paragraph?
Schools of tomorrow will be more like
shopping malls than traditional schools.
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answer. This feature is found on page 461 of your textbook.
Summarizing Information
What are the supporting details of the
main idea?
Sandburg school will have a library that
looks like a Barnes & Noble superstore,
a gym with updated amenities like a
rock-climbing wall, and a food court
instead of a cafeteria.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 461 of your textbook.
Summarizing Information
Write a short summary that will help
you remember what the paragraph is
about.
Summaries will vary.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 461 of your textbook.
History: Ancient
Job Concerns
Worries about employment are not limited to
modern economies. For example,
archaeologists have found symbols connected
with job placement in the ruins of ancient
Babylon.
History: Jobs Programs
Jobs programs were created by the federal government
during the 1930s. The Federal Art Project employed
artists to depict American history and everyday life in
public buildings. These artists created more than 2,500
murals and 17,700 sculptures.
The Federal Writers Project employed writers who
worked on many different publications. The best known
was the American Guide series–tour guides that
included information on the history, geography, industry,
and culture for each of the 48 states.
Milton Friedman
1912–
Click the picture to listen to
the selection on page 466
of your textbook to find out
more about Milton
Friedman. Be prepared to
answer questions that
appear on the next two
slides.
This feature is found on page 466 of your textbook.
Milton Friedman
1912–
What is Friedman’s
argument against an
“independent” central
bank?
It gives a few people too
much power without any
checks.
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answer. This feature is found on page 466 of your textbook.
Milton Friedman
1912–
What rule does
Friedman propose to
govern decisions of
the Federal Reserve
System?
Friedman proposes a legislated
rule instructing the monetary
authority to achieve a specified
rate of growth in the stock of money.
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answer. This feature is found on page 466 of your textbook.
End of Custom Shows
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