Economic Policy (Macroeconomics)
Just the Facts
What economic problems do politicians most commonly face?
Recession and inflation.
What statistics serve as indicators for these problems?
For recession, the Gross Domestic Product and Unemployment Rate are commonly used. For inflation, the Consumer Price Index and Producer Price Index are most commonly cited in the news.
Who is counted and not counted in the unemployment rate?
The unemployment rate counts only those actively seeking work (defined as within the past four weeks). “Marginally attached workers” (“discouraged workers” who have stopped looking, and persons whose ability to work is hindered by family responsibilities or transportation problems) are not counted.
What is an acceptable unemployment rate?
Some economists argue that an unemployment rate as high as 5.5% is acceptable since that portion of the work force is in the process of changing jobs at any given time. Others argue that an acceptable rate is closer to 4.5%. Therefore “full employment” is between 4.5 and 5.5%
What are the four types of unemployment?
Cyclical, structural, seasonal, and frictional.
What is an acceptable rate of inflation?
What is the difference between cost-push and demand-pull inflation?
Cost-push inflation is caused by rising production costs. Demand-pull inflation is caused by increased demand for goods and services.
Is push-pull inflation an exotic animal discovered by Dr. Doolittle?
No, that is a push-me-pull-you. Push-pull inflation occurs when rising production costs and increased demand combine to force prices upward.
Who conducts fiscal policy?
The president and Congress.
What are the tools of fiscal policy and how are they used?
Tax rates and government spending. During periods of recession, taxes are cut and/or government spending is increased to put more money into circulation. During periods of inflation, taxes are increased and/or government spending is reduced to take money out of circulation.
What is the difference between supply-side and demand-side policies?
Supply-side policies are premised on the idea that economic growth is best stimulated by tax cuts aimed at producers or suppliers of goods and services. Supply-side advocates thus support lowering business and corporate taxes and a reduction in the capital gains tax. Demand-side policies are premised on the idea that economic growth is best stimulated by tax cuts aimed at consumers on the demand side of the economic equation. Demand side advocates favor lowering taxes for middle- and lower-class consumers.
Who conducts monetary policy?
The Federal Reserve Board (the Fed).
What are the tools of monetary policy and how are they used?
Interest rates (discount rates), reserve requirements, and open market operations. During periods of recession, the Fed lowers interest rates and reserve requirements, and buys government securities to put more money into circulation. During periods of inflation, the Fed raises interest rates and reserve requirements, and sells government securities to take money out of circulation.