Chapter 15

Economic Stability

Macroeconomic Equilibrium

Aggregate Supply

    Aggregate Demand

    Macroeconomic Equilibrium

Stabilization Policies

    Demand-Side Policies (Keynes)

 Fiscal Policy (Taxing and Spending)

Congress and President

   Taxes (decrease to stimulate)

Spending (increase to stimulate)

       Multiplier

Problems with Fiscal Policy:

•        Deficit spending increases the national debt
•        Crowds out private investment
•        Increases inflation
•        Political pressures hinder timing

Automatic Stabilizers

       Progressive Income Taxes during Expansion

       Unemployment and Welfare Spending during Recession

Supply-Side Policies (Reagan)

Smaller Government

        Less Regulation

        Lower Taxes

Monetarist Policy (Friedman)

Slow and steady increases in money supply

        Short Term effects only

        Long Term result is inflation

Politics, Politics, Politics

Discretionary Fiscal Policy

    Recognition Lag (3 months)

    Implementation Lag (Acts of Congress)

    Short Business Cycles (small ripples)

    Congressional Gridlock

Non-Discretionary Fiscal Policy

    Automatic Stabilizers (no vote needed)

Monetary Policy (non-political)