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Government and the Economy

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Prior to 1930s

  • Little government involvement in improving economic performance
  • Market outcomes prevailed

Great Depression

  • High unemployment: as much as 25%
  • Substantial reduction in living standards

Causes

  • Stock speculation bid up stock prices
  • Increases in tariffs--caused a reduction in international trade
  • Actions of Federal Reserve System--cut the money supply

Government roles since 1930s

  • Provide jobs--keep unemployment low
  • Maintain stable prices--avoid inflation
  • Promote growth in the economy

Unemployment

  • Types
    • Frictional--people who are between jobs
    • Structural--people who lose their job because of changes in consumer prefernces or technology
    • Cyclical--people who lose their job because businesses are cutting back on production
  • Measurement of unemployment
    • Monthly interviews are conducted throughout the U.S.
  • Criteria for being counted as unemployed
    • 16 years or older
    • Available for work
    • Made some effort to find work
  • Full employment--little unemployment except frictional, usually considered to be about 5%.
  • Current rate: 4.7% and increasing

Inflation

  • Definition: General increase in prices
  • Cause: Demand > supply
  • Who is hurt?
    • Lenders who are repaid in less valuable dollars
    • People on fixed incomes who pay higher prices but have no more money
  • Measurement
    • Monthly surveys of sellers are conducted throughout the U.S.
    • Inflation rate determined by computing the cost of a market basked of goods--simple example below:
    •   100 Galon Gas 10 Lbs. Steak Total Cost
      Year 1 $1.00 $2.00 $120
      Year 2 $1.25 $3.50 $160
    • Rate of inflation is: (160-120/120 = 33%
  • Consumer Price Index (CPI) is the most common measure of inflation in the U.S.
    • Based on a market basket of about 600 goods and services
    • Current rate: 2-3% per year
  • Hyperinflation: An inflation rate of > 50%/month
  • Usually caused by governments printing money

Growth

  • Measurement
    • Gross Domestic Product: Dollar value of final goods and services produced
  • Current rate: Negative
  • Important terms
    • Recession: two consecutive quarters where GDP declines
    • Depression: unemployment >10% and a significant decline in GDP
  • Balancing inflation and growth: Very rapid growth in GDP may trigger inflation
Copyright 2008, by the Contributing Authors. Cite/attribute Resource . factadmin. (2007, October 25). Government and the Economy. Retrieved January 08, 2011, from Free Online Course Materials — USU OpenCourseWare Web site: http://ocw.usu.edu/university-studies/u-s-institutions/government-and-the-economy.html. This work is licensed under a Creative Commons License Creative Commons License