Chapter 17: Stabilizing the National Economy · High Tax Revenues From Rapidly Growing Economy...

Application and Enrichment

ONTROLLING UNEMPLOYMENT AND INFLATION

THOUGHTS ABOUT INFLATION

Shortly after a period of high inflation, the chairperson of a congressional committee invitedtwo economists to address the committee regarding what caused the inflation.

Directions: Read each statement and identify it as having been made by a demand-pull economist (by writing DP) or a cost-push economist (by writing CP).

1. The Federal Reserve Board of Governors allowed the money supply to grow faster than the growth inoutput of goods and services.

2. Credit-card purchases by consumers caused a greater demand for products than businesses were ableto supply.

3. The United Auto Workers (UAW) was successful in negotiating wage increases for thousands of unionmembers across the country. The automobiles themselves were unchanged, with the same features,options, and guarantees.

4. The Organization of Petroleum Exporting Countries (OPEC) voted to cut production of crude importedby the United States and used here in the production of gasoline, petrochemicals, fuel, oil, and plastics.

5. Computer manufacturers, faced with a shortage of computer programmers, had to raise prices on newmodels to pay higher wages.

6. After taking office, the president held fast to a campaign pledge to cut personal taxes by 30 percentover two years. The decrease in taxes meant consumers had more disposable income.

7. After building a $90 million addition to its research division, Leland Pharmaceuticals raised its prices 5 percent to help pay off its debts.

8. The government decided to build up the nation’s transportation system. It issued multimillion-dollarcontracts to road builders and railroads, putting new demands on the country’s concrete and steel factories.

Directions: On the lines below, describe the recommendations each witness would make to avoid inflationin the future. Then write your own recommendation.

9. Demand-pull economist

10. Cost-push economist

11. Your recommendation

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Enrichment Activity 17

Teaching Transparency

Application and Enrichment

Review and Reinforcement

ACROSS

4. Policy favoring growth of money supply at 3 to 5percent a year (two words)

8. Policy of using taxation and spending to affect business activity overall

9. People who do not report income to federal orstate government (two words)

10. Period of unemployment and rising prices

11. Policy using monetary, fiscal policies to predict planning, saving, investing

DOWN

1. Rate that changed from 4 to 6 percent

2. Type of inflation with pull

3. When unemployment is below 6.5 percent, there isthis (two words).

5. Kind of inflation with full employment (two words)

6. Economists who oppose fiscal policy to stimulate orslow the economy

7. Describes movement of income between peopleand government (two words)ACROSS

C HAPTER 17 STABILIZING THE NATIONAL ECONOMY

Directions: Use the following clues to fill in the vocabulary terms on the grid below.

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Economic VocabularyActivity 17

450A

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S UMMARIZING INFORMATIONSummarizing information helps you to remember the main ideas and important facts con-tained in a long reading selection. To write a summary, rewrite the main ideas of the readingselection in your own words. Do not copy sentences or phrases from the text. Make sure yoursummary is much shorter than the reading selection, but captures the selection’s main ideas.

Directions: Read the remarks below from the chairman of the Federal Reserve Board, Alan Greenspan.Then, on a separate sheet of paper, answer the questions that follow.

At the root of this expansion of economic activity has been a marked increase in the productivity of the nation’s workforce. Increases in productivity allowed real wages to rise and the economy to grow. It is this acceleration of productivity over recent years that has explained much of the surprising combination of a slowing in inflation and sustained rapid real growth.

American industry, quite generally, has shared an improved level of efficiency and cost containment through high-techcapital investment, and not solely in newer industries at the cutting edge of innovation. Our century-old motor vehicleindustry, for example, has raised output per hour by a dramatic 4.5 percent annually on average in the past two years,compared with a lackluster 1.25 percent on average earlier this decade. Much the same is true of many other matureindustries, such as steel, textiles, and other stalwarts of an earlier age. This greater ability to pare costs, increase pro-duction flexibility, and expand capacity are arguably the major reasons why inflationary pressures have been held incheck in recent years.

1. What is the main idea of this passage?

2. What facts does the author provide to support the main idea?

3. Write a short paragraph summarizing this passage.

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S OURCES ON ECONOMIC STABILITYPrimary sources are original records of events. Secondary sources are documents created afteran event occurred. They analyze and interpret events and information.

Directions: Read the following excerpt from an article that was posted on the Web site of CNN (Cable News Network) on November 2, 1999. Then answer the questions that follow.

U.S. consumer spending rose at a moderate pace in September while Hurricane Floyd flattened income levels by keeping thousands of East Coast workers temporarily away from their jobs, the government reported Tuesday.

Personal income was flat in September, compared to the 0.3 percent gain expected by analysts and the 0.4 per-cent rise recorded in August, the Commerce Department said. Without the effects of Hurricane Floyd, personalincome would have risen 0.3 percent, the report said, in line with forecasts.

Consumer spending, meantime, advanced 0.4 percent, just above analysts’ estimates of a 0.3 increase but halfthe 0.8 gain registered the month before. Consumer spending fuels about two-thirds of the nation’s economy.

Even with the one-time weather-related effects, economists took the numbers as encouraging signs that con-sumer spending is beginning to slow, reducing the threat of accelerating inflation. . . .

1. Is the excerpt above a primary source or a secondary source, or does it combine aspects of both? Explain.

2. What is the writer’s main purpose: stating facts or expressing an opinion?

3. What is the source that the writer cites? Is that source reliable?

4. Suppose you were a historian 100 years from now and you were analyzing economic stability in the 1990s. Whatare some kinds of additional information you would need?

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S TABILIZING THE NATIONAL ECONOMYGovernment policies are rarely based on a single economic viewpoint. Rather, they are usuallyshaped by debate over competing ideas. In this chapter, you learned about two groups of econ-omists: the Keynesians and the monetarists.

Directions: Each of the statements below is a characteristic of one of these groups. If the statement reflectsthe point of view of a Keynesian, write K. If it reflects the viewpoint of a monetarist, write M.

1. ”The government should keep its hands off the economy. Just keep the money supply under control, and every-thing will take care of itself.”

2. “Unemployment is the highest it has been in 40 years. The government has to start putting people back towork with a jobs program.”

3. “The recession is just a temporary lack of aggregate demand. We would have a recovery if the governmentwould step in and create more demand by cutting taxes and increasing spending.”

4. “Aggregate demand is growing too fast. Naturally, the result is high inflation. We need to bring demand downby raising taxes and reducing government spending.”

5. “Of course money’s not worth what it used to be. There’s too much of it around. We’ve got to get the Fed totighten money supply.”

Keynesians pay particular attention to how money is injected into and leaked from the economy.

Directions: Indicate with an I or an L whether each of the following is an example of an injection into orleakage from the economy.

6. Chrysler replaces an outdated assembly line with modern equipment.

7. Sears increases its inventories in anticipation of high December sales.

8. Congress raises the amount deducted from wages for Social Security.

9. USX sells bonds and uses the money to finance a new steel mill.

10. Consumers reduce spending and increase savings because of concern over a growing recession.

11. The federal government starts a new jobs program and hires 50,000 workers to clean up the highways.

12. The state of Massachusetts increases payments to families with dependent children.

13. Consumers respond to high interest rates by purchasing more certificates of deposit.

14. The excise tax on gasoline is raised by $.05 per gallon.

15. A hydroelectric dam project is started by the federal government.

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Critical Thinking Activity 21 Reteaching Activity 17

Reinforcing Economic Skills 13

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S OCIAL SECURITY AND YOUDo you ever imagine yourself at age 65 or 70? Today many people look forward to gettingolder, leaving stress-filled jobs behind. However, before the 1930s being old and without a job was usually a scary prospect. Most elderly, jobless people were poor. So the government mandated that workers pay social security taxes to support the elderly. The time line belowshows some of the influences on, and changes to, Social Security since its inception.

Directions: Use the information above to answer the following exercises.

1. How much did the government receive in Social Security taxes for every $60,000 of wages in 1999?

2. Why do you think the ratio of contributors to retirees was so high in 1950?

3. Why do you think the ratio was so much lower in 1997?

4. How does the increase in average life span affect Social Security funding?

5. Do you think the government should continue to force workers to put aside money for their old age? Why orwhy not?

1930

The average life expectancy for Americans is 63 years of age.

1935

1950

1997

1999

2000 2025

President Franklin Roosevelt approves the bill that creates Social Security. The first Social Security tax is 2% on the first $300 that a worker earns.

For each person who receives Social Security benefits,16 workers pay into the system.

For each person who receives Social Security benefits,three workers pay into the system.

The tax rate for Social Security, including contributions fromthe employer and employee, is 12.4% on wages up to $72,600.

The average lifeexpectancy forAmericans is 75years of age.

For every person who will receive Social Security benefits,two workers will be contributing to the system.

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P OLICIES FOR GROWTHEconomic growth means the expansion of the economy to produce more goods, jobs, andwealth. In a recent year the Federal Reserve Board cut interest rates by 0.75% each month forthree months. Meanwhile, the following signs of growth occurred in the U.S. economy.

Directions: For each headline below, explain how the reduction in interest rates probably encouraged eachinstance of growth.

1. Retail Sales Up 6.3% Over Last Year and Still Rising!

2. Housing Construction Rising at a Rate of 9% a Year

3. Wages and Salaries Increase More Than 4% This Year

4. Unemployment Rate Reaches a 28-Year Low of 4.3%

5. Gross Domestic Product Up Almost 4% From Last Year

6. High Tax Revenues From Rapidly Growing Economy Produces a National Budget Surplus

7. Choose two of the above signs of growth that you think have a cause-and-effect relationship and explain thatrelationship.

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Economic Concepts 17

Annual Percent Price Change in Selected Items from the CPI

ALL ITEMS

Food

Shelter

Fuel and other utilities

Apparel and upkeep

Private transportation

New cars

Gasoline

Public transportation

Medical care

Entertainment

Commodities

1987

3.6

4.1

4.7

–1.1

4.4

–3.0

3.6

–4.0

3.5

6.6

3.3

3.2

1988

4.1

4.1

4.8

–1.4

4.3

3.3

2.0

0.9

1.8

6.5

4.3

3.5

1989

4.8

5.8

4.5

3.3

2.8

4.9

2.0

9.5

5.0

7.7

5.2

4.7

1990

5.4

5.8

5.4

3.5

4.6

5.2

1.8

14.1

10.1

9.0

4.7

5.2

1991

4.2

2.9

4.5

3.3

3.7

2.6

3.8

–1.8

4.4

8.7

4.5

4.2

1992

3.0

1.2

3.3

2.2

2.5

2.2

2.5

–0.2

1.7

7.4

2.8

2.0

1993

3.0

2.2

3.0

3.0

1.4

2.3

2.4

–1.3

10.3

5.9

2.5

1.9

1994

2.6

2.4

3.1

1.0

–0.2

3.1

3.4

0.5

3.0

4.8

2.9

1.7

1995

2.8

2.8

3.2

0.7

–1.0

3.7

2.2

1.6

2.3

4.5

2.5

1.9

1996

3.0

3.3

3.2

3.1

–0.2

2.7

1.7

6.1

3.4

3.5

3.4

2.6

1997

2.3

2.6

3.1

2.6

0.9

0.7

0.2

–0.1

2.6

2.8

2.1

1.4

I NFLATION & DEFLATIONThe Consumer Price Index (CPI) is an indicator of inflation or deflation. This table shows changes in selectedgoods and services from the CPI of over a period of ten years.

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Economic Concepts Transparency 17

Consumer ApplicationsActivity 21

Free Enterprise Activity 21

A CHIEVING ECONOMIC STABILITY

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In the United States, the Federal Reserve Board controls the supply of money. In many other countries, the govern-ment makes these decisions, with greater or lesser effectiveness. The graph below shows the changing money supplyand prices in 32 developing nations of the Western hemisphere.

Source: World Economic Outlook, International Monetary Fund, 1998

1. The graph shows the percent change each year in the money supply and consumer prices. What was the rate of

increase in consumer prices in 1991?

2. Suppose you lived in such an economy and received no raise during the year. Compare the purchasing power of

your wages at the end of the year with their purchasing power at the beginning of the year.

3. In what ways might this affect your purchasing decisions?

4. What percent pay raise is needed to keep up with inflation?

5. What would happen to people living on fixed incomes?

6. In what year of the decade did these nations first make an effort to control the supply of money?

7. How did consumer prices react?

8. During which 2-year period did they finally come close to subduing inflation?

9. What money supply policy was in effect during those years?

Money Supply and Consumer Pricesfor 32 Western Hemisphere Developing Nations

400

350

300

250

200

150

100

50

1990 1991 1992 1993 1994 1995 1996 1997 1998*1999**IMF estimates

% C

hang

e fr

om P

revi

ous

Year

Consumerprices

Broad moneyaggregates

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EXAMINING THE CARTOON

Multiple Choice

1. What is the basic message of the cartoon?

a. Wal-Mart has taken over Woolworth’s business. b. Discount chains are winning in the marketplace.c. Americans no longer value the five-and-dime. d. all of the above

2. Which economic concept or concepts are illustrated by the cartoon?

a. supply and demand b. risk and competitionc. capitalism and economic choices d. all of the above

Critical Thinking

3. Analyzing the Cartoon Imagine that the cartoon includes a person looking in through the store window.Write an appropriate comment for that character to make.

4. Expressing Your Opinion Do you think America has benefited or suffered from the growth of huge discount chains like Wal-Mart? Explain.

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HE END OF AN ERAGenerations of Americans grew up going to “Woolworth’s.” The venerable five-and-dime storeoriginated in 1879 and became a presence in virtually every downtown in the United States. Butchanges in consumer preferences forced Woolworth Corporation to do away with its namesakegeneral merchandise stores. Shoppers turned away from the homey stores—which often featureda lunch counter—to huge discount stores and specialty retailers.

Directions: Study the cartoon below. Then answer the questions that follow.

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c1997 Jimmy Margulies, The Record, New Jersey reprinted by permission.

really benefited from the eight-year economicexpansion. . . .

The sector where workers are truly scarce, however, isinformation technology, with some 400,000 jobs reck-oned to be open. Texas Instruments, the semiconductorcompany, has 800 jobs it hasn’t been able to fill in Dallas.To find warm bodies, the company pays $1,500 to anyemployee who recruits a new worker and gives him or hera chance to win a new, fully loaded Ford Explorer that’sparked in the lobby at headquarters. Even so, a shortageof experienced chip designers has pushed starting salariesup from $55,000 to about $65,000 over the past fiveyears.

But Roger Coker, TI’s director of staffing for theUnited States, says the company is using every trick in thebook to fight labor cost creep. It has started offering stockoptions to more employees, making them available notjust to vice presidents but to all managers. That easessome of the pressure for increased salaries. The companyis also fighting in Washington to allow more foreign engi-neers and designers to take jobs in the United States ontemporary H-lB visas. In addition, it is using the Internet tohire 28 percent of its experienced engineers and 17 per-cent of its new college graduates, which greatly cuts thecost of recruitment.

. . . TI is [also] scouring smaller rural communities fortalent. When Coker got wind that a factory was closing inWichita Falls, Texas, his recruiters went there and found13 workers, whom the company relocated to Dallas. . . .The net effect, says Coker, is that “I don’t see labor coststranslating into the pricing structure of our products.”

The reason high-tech employers have trouble findingpeople—even at a time when folks remain unemployed or

underemployed—is the mismatch of jobs and skills. Butemployers are attacking the roots of that problem, form-ing alliances with local educational institutions to createmore workers with the right skills. . . .

Are all these macroeconomic tools enough to hold offinflation? Challenger thinks they may be. He argues thatthe economy is “self-correcting” because employers willdo whatever it takes to avoid passing increased labor coststhrough to the marketplace. But Diane Swonk, chief econ-omist of Bank One, also in Chicago, thinks it’s inevitablethat tight labor conditions will spark inflation.

Swonk notes that smaller companies, particularly inthe service sector, don’t command all the tools that biggercompanies have to hold wage costs down. “We have seena turning point,” she says. “It will be so gradual that it’shard to notice, but that doesn’t mean it hasn’t occurred.”Other like-minded economists are calling for the FederalReserve to increase interest rates by a full percentagepoint by the middle of next year.

For now, at least, the absence of clear inflationary signals in the consumer and producer price indexesstrengthens the hand of experts who argue that some-thing has changed in the economy, loosening theautomatic linkage between full employment and inflation.They don’t argue that inflation will never occur, just thatcurrent gains in employment and income aren’t yet athreat. If they’re right, the U.S. economy could keep onexpanding, making it to the nine-year mark in February.But as everybody knows, Greenspan could cork the bottleat any moment and ruin the party.

Holstein, William J. “Are Raises Bad for America?” U.S. News and World Report,August 20, 1999.

42 Primary and Secondary Source Readings

ANALYZING THE READING

1. How has the Internet aided employers in finding workers at the right price?

2. What are some of the incentives companies like Texas Instruments are using to attract employees?

3. Why are high-tech employers having trouble finding workers? How are they tackling the problem?

4. Do you think this article strengthens or weakens the argument that inflation is linked to employment? Explain.

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Cooperative Learning Simulations and Problems 21

Primary and Secondary Source Reading 21

Math Practice for Economics Activity 21

Economic Cartoons Activity 21

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E CONOMIC INSTABILITY

GROUP PROJECT

Unemployment and inflation are two forms of economic instability. The cost of instabilitycan be measured in dollars fairly easily, but its costs in human terms is much harder togauge. How does economic instability affect individuals, families, and lifestyles? Use theinstructions in the chart below to help your group prepare for a class discussion about thesocial costs of economic instability.

Preparation for Discussion

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Group 1 Group 2 Group 3

• Interview adult family and friends • Find out about past and present • Identify social problems andabout personal experiences support programs recommend solutions

• Create 10–20 interview questions • Decide what resources to use • Discuss how people cope

• Conduct interviews • Gather information • Propose solutions

• Summarize results • Summarize research • Summarize proposals

1. Group Work Stage 1: Form three groups.Decide what group will be assigned to each of the discussion strategies outlined in the chart.Each group has a different task. Group 1 collects personal experiences. Group 2 gathers informationabout support services available for those sufferingduring unstable economic times. Group 3 studiesother problems that are created by economicuncertainty.

2. Group Work Stage 2: Divide and assign the taskfor your group as you see fit. Proceed according tothe steps in the chart. Group 1 devises interviewquestions that inquire about personal experiencesduring times of economic instability. Group 2 selectsreferences to find out about support programs forpeople affected by economic instability. Group 3discusses how people cope with uncertainty andlack of opportunity.

3. Paired Work Stage 3: Group members work inpairs to complete the tasks. Each pair prepares abrief report detailing its findings or proposals.

4. Group Sharing Stage 4: Pairs rejoin the groups andgive their reports. After all pairs have made their presentations, synthesize members’ contributions.Group 1 summarizes each case study and makessome general observations. Group 2 makes a chart ofpast and present assistance programs. Group 3 creates a list of recommendations for change.

5. Group Analysis Stage 5: Groups share their finalwork with the class. The class follows up with a discussion using these questions as a springboard:What problems do the unemployed and others faceduring periods of economic instability? Are thereenough programs to help people deal with theseproblems and do these programs work? Are theproposed solutions practicable?

Group Process QuestionsDid the group agree on the assignment of tasks?

Did each member contribute ideas?

Did you find this a helpful way to study? Why or why not?

What would you change to make the group work moreeffective?

COOPERATIVE GROUP PROCESS

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Resource ManagerCHAPTER 17

ighflying Dell Computer is on a hiring tear, with plansto add as many as 5,000 people to its payroll over the nextyear. Problem is, the job market in its hometown, Austin,Texas, as in many other parts of the country, is tighter thana pair of bicycle shorts. In particular, demand for such spe-cialists as systems engineers and programmers is whitehot, and pay levels are inching up. But Dell wouldn’tdream of charging more for its personal computers to off-set rising labor costs. “We’re not in the business ofpassing through price increases,” says Vice ChairmanKevin Rolling. “We’re passing through price decreases.”Indeed, the company recently introduced a PC that sellsfor just $829, its cheapest ever.

Whether companies like Dell can keep hiring withoutspawning inflation is the economic puzzler that theFederal Reserve Board and Chairman Alan Greenspan arepondering. The Fed raised interest rates by a quarter per-centage point . . . and is widely expected to hike themagain. . . . The issue now is whether the central bank willcontinue jacking up rates—and whether it’s at all neces-sary to do so.

The Fed’s leading hawk is Laurence Meyer. He andother inflation-phobes are worried that American work-ers’ recent pay gains will translate into inflation. . . .

But changes at the ground level in the Americaneconomy suggest that the linkage between increasedwages and inflation isn’t as ironclad as it once was. LikeDell, companies are going to great lengths to pay certaincategories of workers more without passing those costson to consumers. They are also tapping new pools oflabor, both urban and rural. . . .

To find the right workers at the right price, companiesalso are relying on new tools such as Internet searches andonline job listings at Monster.com and Jobtrak.com.Classified ads in newspapers are increasingly availableonline, and many companies list job openings on theirWeb sites so that a restless worker in, say, San Diego can

quickly scout out job openings in New Hampshire andapply online.

In short, labor-force management is suddenly one ofthe most important issues facing corporate America. Thereason is simple. Aside from a handful of sectors such asconstruction materials and medical services, the vastmajority of companies don’t have pricing power, meaningthey can’t charge more for the things they sell. . . .

Changes at the ground level in the

American economy suggest that the

linkage between increased wages

and inflation isn’t as ironclad as it

once was.

Moreover, the “churn” rate in the work force is excep-tionally high. Despite a booming economy, outplacementconsultant Challenger, Gray & Christmas says Americancompanies will lay off more than 700,000 workers thisyear, the most this decade. Yet overall unemploymentremains at 4.3 percent. The implication is that employersare shedding older, more expensive workers and replacingthem with new employees or relying on various forms ofcontingent labor. “Downsizing is a valve that releases wageinflation steam,” says John Challenger, chief executive ofthe Chicago-based firm.

Changes in the nature of American labor marketslead the more dovish economists to argue that, yes,maybe one day tight labor conditions will trigger inflation,but it isn’t happening yet. . . .

Besides, raising interest rates too much . . . will chokeoff growth that is finally reaching Americans who haven’t

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Primary and Secondary Source Readings 41

Name Date Class

A RE RAISES BAD FOR AMERICA?The stability of the national economy is always a concern, no matter how strongthe system may seem at a given time. Inflation, unemployment, and poverty aresome indicators economists use to evaluate economic stability. When unemploy-ment is low and wages rise in a booming economy, there is always the concern thatconsumer prices will also go up or inflation will occur. Rising wages and benefitsare the topics of the following U.S. News and World Report article by William J.Holstein As you read the article, consider the effects of the additional costs on business, the consumer, and the economy. Then answer the questions that follow.

21

H

High Wages

and

Great Benefits

You and your students can visit ett.glencoe.com —the Web site companion to Economics Today andTomorrow. This innovative integration of electronic andprint media offers your students a wealth of opportuni-ties. The student text directs students to the Web site forthe following options:

• Chapter Overviews • Student Web Activities

• Self-Check Quizzes • Textbook Updates

Answers are provided for you in the Web ActivityLesson Plan. Additional Web resources and InteractivePuzzles are also available.

Use the Glencoe Web site for additional resources. All essential content is covered in the Student Edition.

ECONOMICS

Reading for the StudentThe American Economy: Government’s Role, Citizen’s

Choice, 3rd ed. Washington, D.C.: Close Up Foundation,1999. Explores government’s role in economic policies.

Multimedia MaterialJohn Maynard Keynes/Fiscal Policy and Monetary Policy/

Stabilization Policy videos in Economics U$A. TheAnnenberg/CPB Collection, South Burlington, VT.

Additional Resources

Spanish Economic Concepts Transparency 17

Spanish Vocabulary Activity 17

Spanish Reteaching Activity 17

Spanish Section Quizzes for Chapter 17

Spanish Chapter 17 Audio Program, Activity, and Test

Spanish Resources

Vocabulary PuzzleMaker CD-ROM

Interactive Tutor Self-Assessment Software

ExamView® Pro Testmaker

NBR Economics & You Video Program (English/Spanish)

Presentation Plus!

Glencoe Skillbuilder Interactive Workbook CD-ROM,Level 2

TeacherWorks CD-ROM

MindJogger Videoquiz

Interactive Economics! CD-ROM

Audio Program (English or Spanish)

Technology and Multimedia

Assessment and Evaluation

ExamView® Pro Testmaker

PROCEDURE

1. Have students conduct a trial to decide whether the federal government has kept its promises to stabilize theeconomy. First, list these promises from the above excerpt on the chalkboard:

• to promote maximum employment• to promote maximum production• to promote maximum purchasing power

Distribute recent newspapers, news magazines, almanacs, and federal publications. Direct students to look forarticles that discuss the government and the economy.

2. Have a “defense attorney” meet with five or six “witnesses” with articles that show that the government keepsthe promises listed on the chalkboard. Have a “prosecuting attorney” meet with five or six “witnesses” with articles that suggest that government actions undermine the economy’s stability. Instruct each group to preparea skit portraying a lawyer questioning friendly witnesses.

3. Have students conduct the trial. Suggest that attorneys ad-lib questions for hostile witnesses and objections suchas “Hearsay” and that a student “judge” sustain or overrule the objections.

4. Have nonparticipants act as “jurors” to decide which side is more convincing.

Assessment

1. Have players as well as jurors evaluate the skits.

2. Ask each juror to assess the performances of each “side.”

▼BACKGROUND

The Employment Act of 1946 clearly states the federal government’s commitment to stabilizing the economy: “The Congress herebydeclares that it is the continuing policy andresponsibility of the Federal Government . . .to promote maximum employment,production, and purchasing power.”

▼MATERIALS

Recent newspapers, news magazines,almanacs, and federal publications

▼OBJECTIVES

After completing this activity, students will beable to• Recognize government actions that affect

the economy’s stability.• Analyze the effects of government decisions

on the economy.

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E CONOMIC STABILITY

Name Date Class

RUBRICSskit, group work andthe individual

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Performance Assessment Activity 21

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Name Date Class

17, A

14. Economists use the term “leakage” to refer to

a. money that is wasted. b. income that has no effect on aggregate demand.c. income that does not follow the circular flow. d. money that is retained by businesses.

15. High unemployment is usually a sign that

a. the economy is getting better. b. government spending is on the increase.c. purchasing has slowed. d. government has increased the money supply.

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Analyzing Information What effect is an increase in income tax rates likely to have on the undergroundeconomy? Why?

17. Recognizing Bias What is the main difference between Keynesians and monetarists?

APPLYING SKILLS

Using Graphs. Study the graph and answer the questions below.

18. How much was spent on personal outlays in 1990?

19. By how much did spending on tax and nontax payments rise between 1990 and 1995?

20. How much greater was personal income in 1995 than in 1980?

Billi

ons

19801975 1985 1990 1995 1995

Disposition of Personal Income, 1975–1997 (in billions of dollars)

Year

$7,000

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0

Source: Economic Report of the President, 1998 *1997 figures as of third quarter

1,054.8156.4

107.8 $1,319.0

2,795.8

$3,449.8

437.7

5,101.1

$6,150.8

795.1

1,811.5

$2,293.0

312.4

3,966.1

$4,804.2

624.8

5,661.0

987.9

$6,874.4*

169.1

216.4

221.3

254.6

225.6

Savings Tax and Nontax Payments Personal Outlays

Chapter 17 Test Form A

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Name Date Class

SCORE

17, A

S TABILIZING THE NATIONAL ECONOMY

RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. According to some economists, stagflation is caused by

a. demand-pull inflation. b. cost-push inflation.c. recessionary pricing. d. too rapid expansion of the economy.

12. During the 1930s,

a. consumer demand fell significantly. b. government solved the unemployment problem.c. inflation was very high. d. government reduced spending.

13. The economist most closely associated with monetarism is

a. Adam Smith. b. Alan Greenspan.c. John Maynard Keynes. d. Milton Friedman.

A1. demand-pull inflation

2. time lags

3. stabilization policies

4. full employment

5. fiscal policy

6. underground economy

7. monetarism

8. stagflation

9. monetary rule

10. cost-push inflation

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. theory that deals with the relationship between the amount

of money the Federal Reserve places in circulation and thelevel of activity in the economy

b. periods between the time fiscal policy is enacted and the timeit becomes effective

c. combination of inflation and low economic activity

d. theory that wage demands of labor unions and excessiveprofit motives of large corporations push up prices causingstagflation

e. federal government’s use of taxation and spending policies toaffect overall business activity

f. attempts by the federal government to keep the economyhealthy

g. condition of the economy when the unemployment rate islower than a certain number established by economists’ studies

h. theory that prices rise as the result of excessive demand

i. belief that the Federal Reserve should allow the money supplyto grow at a fixed rate

j. transactions by people who do not follow federal and statelaws with respect to reported earnings

Copyright ©

by The M

cGraw

-Hill C

ompanies, Inc.

Name Date Class

17, B

14. According to monetarists, to prevent the Great Depression the government should have

a. decreased the money supply. b. increased the money supply.c. increased employment. d. decreased employment.

15. In terms of the circular flow of income, savings represent

a. leakages. b. injections.c. stabilizers. d. indirect flows.

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Understanding Cause and Effect Explain how a Keynesian and a monetarist would explain what causedthe Great Depression.

17. Analyzing Information Whathappens when the money supply increases when the economy is already atfull employment?

APPLYING SKILLS

Using Graphs. Study the graph and answer the questions below.

18. What percentage of total personal income went to savings in 1980?

19. How many times greater was personal income in 1995 than in 1975?

20. What percentage of income went to personal outlays in 1990?

Billi

ons

19801975 1985 1990 1995 1995

Disposition of Personal Income, 1975–1997 (in billions of dollars)

Year

$7,000

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0

Source: Economic Report of the President, 1998 *1997 figures as of third quarter

1,054.8156.4

107.8 $1,319.0

2,795.8

$3,449.8

437.7

5,101.1

$6,150.8

795.1

1,811.5

$2,293.0

312.4

3,966.1

$4,804.2

624.8

5,661.0

987.9

$6,874.4*

169.1

216.4

221.3

254.6

225.6

Savings Tax and Nontax Payments Personal Outlays

Chapter 17 Test Form B

Cop

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Name Date Class

SCORE

17, B

S TABILIZING THE NATIONAL ECONOMY

RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. One of the major goals of stabilizing the economy is to

a. increase profits. b. increase income levels.c. raise the standard of living. d. maintain low unemployment.

12. The notion that inflation is caused by rising wage demands by labor unions and excessive profit motives oflarge corporations is known as

a. demand-pull inflation. b. demand-push inflation.c. cost-pull inflation. d. cost-push inflation.

13. Monetarism is often linked with the economist

a. Alan Greenspan. b. John Maynard Keynes.c. Milton Friedman. d. Adam Smith.

A1. circular flow of income

2. unemployment rate

3. time lags

4. demand-pull inflation

5. full employment

6. stagflation

7. monetary rule

8. stabilization policies

9. monetarists

10. underground economy

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. combination of inflation and low economic activity

b. transactions by people who do not follow federal and statelaws with respect to reporting earnings

c. attempts by the federal government to keep the economyhealthy through the use of monetary and fiscal policy

d. belief that the Federal Reserve should allow the money supplyto grow at a fixed rate

e. condition in which the unemployment rate is lower than acertain number established by economists’ studies

f. economic model that portrays income as flowing continuouslybetween businesses and consumers

g. percentage of the civilian labor force that is unemployed, butactively looking for work

h. periods between the time fiscal policy is enacted and the timeit becomes effective

i. theory that prices rise as the result of excessive demand

j. proponents of the theory of monetarism

450B

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


tx.ett.glencoe.com

http://tx.ett.glencoe.com

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


450C

Blackline Master

Transparency

Software

CD-ROMVideodisc

Audiocassette

Videocassette

Reading Objectives Reproducible Resources Technology/Multimedia Resources

Section 1Unemployment and Inflation• What are two problems the

government faces in measuringunemployment?

• What are the four kinds ofunemployment?

• How does demand-pull inflation differfrom cost-push inflation?

Section 2The Fiscal Policy Approach toStabilization• How does income flow between

businesses and consumers?• How can the federal government use

fiscal policy to combatunemployment?

Section 3Monetarism and the Economy• What do monetarists think the

government and the Fed should do tostabilize the economy?

• Why do monetarists criticize fiscalpolicy?

Reproducible Lesson Plan 17-1Daily Lecture Notes 17-1Guided Reading Activity 17-1Reading Essentials and Study Guide 17-1Daily Focus Activity 70Section Quiz 17-1*

Reproducible Lesson Plan 17-2Daily Lecture Notes 17-2Guided Reading Activity 17-2Reading Essentials and Study Guide 17-2Daily Focus Activity 77Section Quiz 17-2*Reinforcing Economic Skills 13

Reproducible Lesson Plan 17-3Daily Lecture Notes 17-3Guided Reading Activity 17-3Reading Essentials and Study Guide 17-3Daily Focus Activity 78Section Quiz 17-3*

Daily Focus Transparency 70

Economic Concepts Transparency 17Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareMindJogger VideoquizPresentation Plus!ExamView® Pro Testmaker

Daily Focus Transparency 77Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareMindJogger Videoquiz

NBR's Economics & You*Presentation Plus!ExamView® Pro Testmaker

Daily Focus Transparency 78Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareMindJogger VideoquizInteractive Economics! Presentation Plus!ExamView® Pro Testmaker

*Also available in Spanish

Section Resources

450D

Brian SageNiagara Falls High SchoolNiagara Falls, New York

Measuring Local InflationThe consumer price index (CPI) is the most widely used

measure of inflation and is sometimes viewed as an indi-cator of the effectiveness of government economic policy.Have students research inflation in their local area by con-structing a price index similar to the CPI used by the fed-eral government’s Bureau of Labor Statistics (BLS).

The BLS measures price changes in the following eightmajor groups. Examples of categories in each group arelisted as well. For each grouping, have several students listat least 10 specific items and price them once a month,then construct a price index to measure local inflation.

ACTIVITYFrom the Classroom ofACTIVITYFrom the Classroom of

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


Teaching strategies have been coded for varying learning styles and abilities.L1 BASIC activities for all studentsL2 AVERAGE activities for average to above-average

studentsL3 CHALLENGING activities for above-average students

ENGLISH LANGUAGE LEARNER activitiesELL

Key to Ability Levels

Voluntary Standards Emphasized in Chapter 17Content Standard 19 Students will understand thatunemployment imposes costs on individuals and nations.Unexpected inflation imposes costs on many people andbenefits some others because it arbitrarily redistributes pur-chasing power. Inflation can reduce the rate of growth ofnational living standards, because individuals and organiza-tions use resources to protect themselves against the uncer-tainty of future prices.

Resources Available from NCEE• Capstone: The Nation’s High School Economics Course• Civics and Government: Focus on Economics• Focus: High School Economics

To order these materials, or to contact your StateCouncil on Economic Education about workshops andprograms, call 1-800-338-1192 or visit the NCEE Web siteat http://www.nationalcouncil.org

450D

• Food and beverages(cookies, cereals,cheese, coffee, chicken,restaurant meals)

• Housing (residential rent,home owners’ costs, fueloil, soaps and detergents)

• Apparel and its upkeep(men’s shirts, women’sdresses, jewelry)

• Transportation (airlinefares, new and used

cars, gasoline, car insurance)

• Recreation (newspapers,toys, musical instru-ments, admission fees)

• Education and communi-cation (tuition, postage,telephone services, computers)

• Other goods and ser-vices (haircuts, cosmet-ics, bank fees)

ECON: 16A-B, 23A-C

Timesaving Tools

• Interactive Teacher Edition Access your TeacherWraparound Edition and your classroom resourceswith a few easy clicks.

• Interactive Lesson Planner Planning has never been easier!Organize your week, month, semester, or year with all the lessonhelps you need to make teaching creative, timely, and relevant.

Use Glencoe’s Presentation Plus! multimediateacher tool to easily present dynamic lessonsthat visually excite your students. Using MicrosoftPowerPoint® you can customize the presenta-tions to create your own personalized lessons.

http://www.nationalcouncil.org

450

Why It’s ImportantWhy is it important for the econ-omy to be balanced, or stabilized?This chapter will explain the factorsthat destabilize the economy, andwhat actions are taken to adjust it.

To learn more aboutunemployment andinflation, view theEconomics & You

Chapter 23 video lesson: EconomicGrowth and Stability

Chapter Overview Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.com and click on Chapter 17—Chapter Overviewsto preview chapter information.

IntroducingCHAPTER17

450

Chapter OverviewChapter 17 discusses the causes

and effects of unemployment andinflation, and explores the fiscal andmonetary policies used by the gov-ernment to stabilize the economy.

CHAPTER LAUNCH ACTIVITY

IntroducingCHAPTER17

Use MindJogger Videoquiz to preview Chapter 17content.

Introduce students to chaptercontent and key terms by havingthem access Chapter 17—ChapterOverviews at ett.glencoe.com

Place a set of scales in front of the class, and inform students that the scales repre-sent the economy. Move the scales by adding weights to either side. At the same time,mention that a condition called inflation can upset economic stability. Balance thescales, then set them in motion again, pointing out that unemployment too can causethe economy to become unstable. Tell students that in this chapter they will learn aboutdifferent approaches to maintain economic stability.

ECONOMICS & YOU

Economic Growth and Stability

!9CL2" Chapter 23 Disc 1, Side 2

ASK: Why is unemploymentconsidered a barometer of theeconomy? because unemploy-ment tends to rise during reces-sions and drop during periods ofexpansion

Also available in VHS.

tx.ett.glencoe.com

ECON: 16A, 17C, 18B

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter17/overview.shtml


451

451Stabi l iz ing the Nat ional Economy

Terms to Know• stabilization policies• unemployment rate• full employment• underground economy• demand-pull inflation• stagflation• cost-push inflation

Reading Objectives1. What are two problems the

government faces in mea-suring unemployment?

2. What are the four kinds ofunemployment?

3. How does demand-pullinflation differ from cost-push inflation?

READER’S GUIDE

1

KIPLINGER’S PERSONAL FINANCE MAGAZINE, SEPTEMBER 1998

A booming economy. Record-low unemployment. A blizzard of pink slips [a note stating that a personhas been fired].

What’s wrong with this picture? The fact is, evenin the best of times hundreds of thousands of people

lose their jobs through nofault of their own. . . . Youmight not get any advancewarning, so don’t becaught off guard. Have anup-to-date resume andnetworking system. . . .You want to be able to

launch your job search soonafter you get the bad news.

When people are unemployed, they experience uncer-tainty. In the same way, unemployment in generalcauses uncertainty in the American economy. To keep

the economy healthy and to make the future more predictable forplanning, saving, and investing, the federal government uses mon-etary and fiscal policies. Together these are called stabilizationpolicies. Unfortunately, neither policy is always successful in

stabilization policies: attemptsby the federal government to keepthe economy healthy; includesmonetary and fiscal policies

CHAPTER 17SECTION 1, Pages 451–455


Reproducible MastersReproducible Lesson Plan 17–1Reading Essentials and Study Guide 17–1Guided Reading Activity 17–1Section Quiz 17–1Daily Focus Activity 70Daily Lecture Notes 17–1

MultimediaDaily Focus Transparency 70Economic Concepts Transparency 17Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareExamView® Pro Testmaker

MindJogger VideoquizPresentation Plus!

SECTION 1 RESOURCE MANAGER

OverviewSection 1 describes or explains

measures of unemployment, typesof unemployment, and the demand-pull and cost-push theories of inflation.

Answers to the Reading Objectivesquestions are on page 455.

Preteaching VocabularyVocabulary PuzzleMaker

READER’S GUIDE

Project Daily FocusTransparency 70 and have students answer the questions.

This activity is also availableas a blackline master.

Daily Focus Transparencies

U NEMPLOYMENT

1. Which occupation had the highest unemployment rate?

2. Which occupation had the lowest unemployment rate for men?For women?

7070

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Unemployment—Rates and MeasuresUnemployment and Unemployment Rates by Occupation and by Sex, 1997

For civilian noninstitutional population 16 years old and over. Rate represents unemployment as a percent of the laborforce for each specified group. Based on Current Population Survey.

UNEMPLOYMENT RATEOCCUPATION 1997

Total Male FemaleTotal1 4.9 4.9 5.0Managerial and professional specialty 2.0 1.9 2.1

Executive, administrative, and managerial 1.9 1.8 2.0Professional specialty 2.0 2.0 2.1

Technical sales, and administrative support 4.1 3.6 4.4Technicians and related support 2.4 2.2 2.6Sales occupations 4.9 3.6 6.2Administrative support, including clerical 3.8 4.2 3.7

Service occupations 6.7 6.5 6.8Private household 8.4 12.6 8.2Protective service 3.7 3.4 5.2Service except private household and protective 7.0 7.6 6.7

Precision production, craft, and repair 4.8 4.8 5.1Mechanics and repairers 3.5 3.4 4.5Construction trades 7.0 7.0 7.2Other precision production, craft, and repair 3.4 3.0 5.0

Operators, fabricators, and laborers 7.5 7.1 8.8Machine operators, assemblers, inspectors 6.5 5.1 8.6Transportation and material moving occupations 5.4 5.3 6.0Handlers, equipment cleaners, helpers, laborers 11.1 11.3 10.5

Construction laborers 17.1 16.9 20.8Farming, forestry, and fishing 7.1 6.9 7.8

B Base is less than 35,000.1 Includes people with no previous work experience and those whose last jobs were in the Armed Forces.Adapted from U.S. Bureau of Labor Statistics, Employment and Earnings, monthly, January issue.

BELLRINGERMotivational Activity


Page 451: 16A, 17C, 18B, 23A,24A

Student Edition TEKS



1925 ’95’90’30 ’35 ’65 ’70 ’75 ’80 ’85’40 ’45 ’50 ’55 ’60 2000

Perc

en

tag

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f C

ivil

ian

Lab

or

Forc

e30

25

20

15

10

5

0

YearSource: Standard & Poor’s

The Unemployment Rate

CHAPTER 17

solving the complex problems of the economy. As you read this section, you’lllearn that two of the biggest threats to a nation’s economic stability are highunemployment and inflation.

MeasuringUnemployment

Expert economists advise the Presidentand Congress, but they often disagree

about the causes and cures of the economic problems that peri-odically face the nation. One statistic they all look at, however, is the unemployment rate—the percentage of the civilian laborforce that is without jobs but that is actively looking for work. See Figure 17.1.

High unemployment is usually a sign that all is not well withthe economy. Moreover, the waste of human resources that unem-ployment causes is an extremely serious problem. As a result,maintaining a low unemployment rate is one of the major goals instabilizing the economy.

UnemploymentUnemployment can reduceliving standards, disruptfamilies, and reduce a per-son’s feeling of self-respect.During which year showndid unemployment peak?

unemployment rate: percentageof the civilian labor force that isunemployed but is actively look-ing for work

FIGURE 17.1FIGURE 17.1

452

For an online update of this graph, visit tx.ett.glencoe.com and click on Textbook Updates—Chapter 17.

Student Web Activity Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 17—Student WebActivities to learn how to write an online resume.

452

Answer: 1934

L ECTURE LAUNCHERLBrazil has had high inflationary periods throughout its history. In mid-1994, its monthly inflation reached 50 percent. In 1997, inflation was at 10%. In the United States what is considered an acceptable level of inflation? Why are inflation and unemployment importantto a nation’s stability?

I. Measuring Unemployment

A. The unemployment rate is the percentage of the civilian labor force that is withoutjobs but is actively seeking work.

B. High unemployment is a sign that the economy is not doing well.

C. Types of unemployment: cyclical, structural, seasonal, and frictional

D. Full employment is when the unemployment rate is below 5 percent.

E. The underground economy, consisting of people who do not follow federal and statelaws with respect to reporting earnings, makes it difficult to measure true unemploy-ment rates.

• Discussion Question

Why can’t all unemployment be eliminated? (Structural, seasonal, and frictionalunemployment will always exist.)

17-1

PAGES 452–453

PAGES 454 455

Daily Lecture Notes 17–1

See the Web Activity LessonPlan at ett.glencoe.com for anintroduction, lesson description,and answers to the Student WebActivity for this chapter.

Reading and Organization Problems Students who have difficulty categorizing infor-mation may find it useful to use a framework for comparing the different types of unem-ployment discussed in this section. Have students look for the answers to the followingquestions: What is the nature of this type of unemployment? What are the causes of thistype of unemployment? How does this type of unemployment differ from other types? Howis it similar? Who does this unemployment affect? If necessary, direct students’ search forthe information to answer these questions.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities.

Meeting Special Needs

Guided PracticeL2 Making Connections Have stu-dents identify the four types ofunemployment, and note theirresponses on the board. Next, havestudents note any particular jobsthat are prone to one or more of thefour types of unemployment. Writetheir ideas under the appropriateunemployment type. Then have stu-dents work in small groups to brain-storm ways to eliminate or soften theconditions that cause the four kindsof unemployment. Call on grouprepresentatives to share and discusstheir ideas.

tx.ett.glencoe.com

ECON: 16A, 23A, 23D

ECON: 23A, 24A

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter17/webact.shtml

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter17/walp.shtml

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter17/txtupdate.shtml

453

Types of Unemployment Many types of unemploymentexist. Figure 17.2 describes these kinds of unemployment.Some people work in seasonal jobs or jobs that are sensitive totechnological advances or to changes in the marketplace. As aresult, not all unemployment can or should be eliminated.Moreover, economists disagree over what the level of full employ-ment should be. Economists today generally have come to con-sider the economy at full employment when the unemploymentrate is less than 5 percent.

It is important to remember that the unemployment rate isonly an estimate. The unemployment rate does not includepeople who are unemployed and have stopped looking for work.Nor does it include people who work in family businesses with-out receiving pay.

Unemployment is difficult to measure accurately becausegovernment statisticians cannot possibly interview every personin and out of the labor force. Survey results are also imperfectbecause of the existence of the underground economy. Theunderground economy consists of people who do not follow federaland state laws with respect to reporting earnings. Examples mightinclude tax avoiders, gamblers, and drug traffickers.

full employment: condition ofthe economy when the unemploy-ment rate is lower than a certainpercentage established by econo-mists’ studies

underground economy: trans-actions by people who do not fol-low federal and state laws withrespect to reporting earnings


Types of Unemployment

Type

Cyclical

Structural

Seasonal

Frictional

Definition

Unemployment associated with up ordown fluctuations in the business cycle

Unemployment caused by changes inthe economy, such as technologicaladvances or discoveries of naturalresources

Unemployment caused by changes inthe seasons or weather

Temporary unemployment between jobsbecause of firings, layoffs, voluntarysearches for new jobs, or retraining

Characteristics

Rises during recessions and depressions;falls during recoveries and booms

Can result when workers are replaced bycomputers or other machines or whencheaper natural resources are found else-where; often affects less skilled workers

Affects construction workers, particularlyin the Northeast and Midwest; also affectsfarmworkers needed only during certainmonths of the growing season

Always exists to some degree because ofthe time needed between jobs to findnew work and the imperfect matchbetween openings and applicants

FIGURE 17.2FIGURE 17.2CHAPTER 17SECTION 1, Pages 451–455


Project Economic ConceptsTransparency 17 and have studentsdiscuss the accompanying questions.

IndependentPracticeL2 Illustrating Ideas Organize stu-dents into groups, and assign eachgroup either cost-push inflation ordemand-pull inflation. Have groupsdevelop and perform a scenario thatillustrates their assigned cause ofinflation. Then have students discusswhich cause they think best explainsthe occurrence of inflation.

BLOCK SCHEDULING

Name Date Class

For use with the textbook pages 451–455

U NEMPLOYMENT AND INFLATION

FILLING IN THE BLANKS

Directions: Use your textbook to fill in the blanks using the words in the box. Some words may be usedmore than once.

stabilization policies unemployment rate full employmentunderground economy demand-pull inflation stagflationcost-push inflation fiscal policiesinflation frictional unemployment interest rates

Introduction/ Measuring UnemploymentTo keep the economy stable and healthy, the federal government uses monetary and 1 __________________________.

Together these force are known as 2 __________________________ ; however, they are not always successful in solving

the economy’s problems. Two of the biggest threats to the nation’s economy are high unemployment and

3 __________________________. Economists use statistics such as the 4 __________________________ , or the percent-

age of civilian laborers without a job but looking for work, to judge the economy. Maintaining a low unemployment

rate is a major goal in stabilizing the 5 __________________________. There are different types of unemployment

including cyclical, structural, seasonal, and 6 __________________________. Most economists consider the economy at

7 __________________________ when less than 5 percent of the population is unemployed. Survey results of unem-

ployment can be wrong due to any factors including the 8 __________________________ , when people do not follow

federal and state laws with respect to earnings.

Inflation

17-1

Guided Reading Activity 17–1

Have students work in small groups to track unemployment and inflation in the UnitedStates over the last 25 years. Suggest that they use the Statistical Abstract of the UnitedStates, the Economic Report of the President, and similar reference books for theirresearch. Have groups present their findings in a series of illustrated and annotatedgraphs. Encourage groups to display and discuss their finished graphs.

BLOCK SCHEDULINGELL

Cooperative Learning

Page 452: 16A-B, 23A, 23F-G, 24APage 453: 16A-B, 19C, 23A, 23F,

24A, 26A, 26C

Student Edition TEKSECON: 16B, 23A, 23C, 23F-G, 24C-D

ECON: 23A, 23D, 24D



454 CHAPTER 17

demand-pull inflation: theorythat prices rise as the result ofexcessive business and con-sumer demand; demandincreases faster than total supply,resulting in shortages that lead tohigher prices

InflationA second major problem that

may face any nation is inflation.The economy can usually adapt togradually rising prices. If prices riseabout 3 percent every year, forexample, everyone comes to expectand understand that. Unpredictableinflation, however, has a destabiliz-ing effect on the economy.

During periods of unpre-dictable high inflation, creditorsraise interest rates to maintain thelevel of profits they had beforeinflation began to rise rapidly.This, in turn, may have a slowingeffect on the economy’s growth.

Inflation may also affect con-sumers’ standard of living.

Suppose you receive a 5 percent pay raise in a year in which infla-tion has risen 8 percent. Your real (adjusted for inflation) incomehas decreased. Inflation is a particularly serious problem for peo-ple who live on fixed incomes, such as those who are retired.

Not all economists agree on a single explanation of why infla-tion occurs. Two competing ideas have developed: the demand-pulltheory (prices are pulled up by high demand) and the cost-pushtheory (prices are pushed up by high production costs and wages).

Demand-Pull According to the theory of demand-pull inflation,prices rise as the result of excessive business and consumerdemand. If economy-wide, or aggregate, demand increases fasterthan total supply, the resulting shortage will lead to the biddingup of prices.

Demand-pull inflation can occur for several reasons. If theFederal Reserve causes the money supply to grow too rapidly,individuals will spend the additional dollars on a limited supplyof goods and services. This increased demand will cause prices torise. Increases in government spending and in business invest-ment can also increase overall demand. Aggregate demand canalso increase if taxes are reduced or consumers begin saving less.

Cost-Push The demand-pull theory assumes that increaseddemand will increase output and reduce unemployment. Expe-rience, however, has shown that rising prices and unemployment

How do United States unemployment statisticscompare to those of other industrialized nations?

Unemployment

Unemployment Rate

U.S. Japan France Germany

4.2% 4.7% 11% 10.5%

48% 51% 58% 36%

6 mo. 1 yr. 2 yrs. 5 yrs.

% of Average Wage Received in Benefits

Length of Time Benefits Are Paid

Source: The World Factbook, 2000

454

Chart Point out that some economists illus-trate the cost-push theory of inflation with acircle. Draw a circle, and provide studentswith the following phrases out of order. Havestudents use arrows and the phrases to illus-trate the process of cost-push inflationaround the circle.1. Workers demand higher wages to balance

the decline in their purchasing power.2. Large unions receive wage increases.3. Businesses pay higher wages, causing

their costs to increase.4. Businesses raise prices to maintain profits.5. Consumers pay higher prices for goods.

(which points back to number 1)


Multiple Choice: In the blank at the left, write the letter of the choice that bestcompletes the statement or answers the question. (10 points each)

6. People who do not follow federal and state laws regarding employment are part of

a. frictional unemployment. b. seasonal unemployment.c. structural unemployment. d. the underground economy.

7. Measuring unemployment is difficult because

a. most people do not admit they b. people do not respond to government surveys.l d

SCORE

A1. stabilization policies

2. unemployment rate

3. full employment

4. demand-pull inflation

5. cost-push inflation

Ba. percentage of the civilian labor force that is unem-

ployed, but is actively looking for work

b. theory that the wage demands of labor unions andthe excessive profit motive of large corporationspush up prices

c. attempts by the federal government to keep theeconomy healthy

d. when the unemployment rate is lower than a certainnumber established by economists

e. theory that prices rise as the result of excessive business and consumer demand

Matching: Place a letter from Column B in the blank in Column A. (10 points each)

Name Date Class

17, 1

Section Quiz 17–1

Economic Connectionto... HistoryEconomic Connectionto...

Ancient Job Concerns Worriesabout employment are not limitedto modern economies. For exam-ple, archaeologists have foundsymbols connected with job place-ment in the ruins of ancientBabylon.

Meeting LessonObjectives

Assign Section 1 Assessment ashomework or an in-class activity.

Use Interactive Tutor Self-Assessment Software to review Section 1.

ECON: 16A-B, 23A-B, 23F, 24C

455


Effects of Inflation As Ziggy notes, inflation lowers thepurchasing power of people, especially those on fixed incomes.

17.317.3

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Understanding Key Terms1. Define stabilization policies, unemployment

rate, full employment, underground economy,demand-pull inflation, stagflation, cost-pushinflation.

Reviewing Objectives2. What are two problems the government faces in

measuring unemployment?

3. Graphic Organizer Create a diagram like the one below to describe the four kinds ofunemployment.

4. How does demand-pull inflation differ from cost-push inflation?

Applying Economic Concepts5. Inflation and Deflation Name some factors

that could cause the price of each of the follow-ing to go up or down: oil, medical care, orangejuice, automobiles.

Types ofUnemployment

6. Understanding Cause and EffectConstruct a table that identifies the causes ofinflation. List four causes under demand-pullinflation in column 1 and three causes undercost-push inflation in column 2. For help inconstructing tables, see page xx in theEconomic Handbook.

Critical Thinking Activity

Practice and assesskey skills with

Skillbuilder InteractiveWorkbook, Level 2.

1

can occur at the same time. This combination of inflation and low economic activity is sometimescalled stagflation.

According to some economists, stagflation is aresult of cost-push inflation at work in the economy.The theory of cost-push inflation states that the wagedemands of labor unions and the excessive profit motive of largecorporations push up prices. When businesses have to pay higherwages, their costs increase. To maintain their profit level, businessesmust raise the prices of the goods and services they produce.

During periods of cost-push inflation, unemployment canremain high. Prices are being adjusted for higher wages and prof-its—not because of increased aggregate demand. Without addi-tional aggregate demand, producers have no reason to increaseoutput by hiring new workers.

stagflation: combination of infla-tion and low economic activity

cost-push inflation: theory thathigher wages and profits push upprices

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ReteachHave students demonstrate their

understanding of section content byanswering the following questions:How is unemployment measured?What are the four basic types ofunemployment? How is demand-pull inflation different from cost-push inflation?

1. All definitions can be found in the Glossary.2. Statisticians can’t interview every person in

and out of the labor force; existence of anunderground economy.

3. Diagrams should resemble Figure 17.2 onpage 453.

4. Demand-pull inflation results when demandincreases faster than total supply. Cost-pushinflation results when excessive wage

demands of large unions and excessive profitmotive of large corporations push up prices.

5. Increase in prices: shortage of oil imports,demand for more medical service, badweather conditions in orange groves,higher auto production costs or large raisesfor autoworkers; Decrease in prices: newcrude oil discoveries, better health habits,bumper crop, better technology for efficientproduction

6. Tables should include the following:Demand-pull causes: rapid increase in themoney supply; increased governmentspending and business investment forexpansion; reductions in taxes; reductionsin consumer saving. Cost-push causes:high production costs; wage demands oflarge unions; excessive profit motive oflarge corporations.

Have students identify some ofthe ways in which high unemploy-ment and high inflation affect theeconomy.

Name Date Class

17, 1For use with textbook pages 451–455


DRAWING FROM EXPERIENCE

Your income and the prices of goods and services determine how much you will buy. Suppose youno longer receive an income from your job or your allowance. Will you continue buying things?Or, if prices rise, you may buy less. The entire economy may slow down from these conditions—unemployment or inflation.

stabilization policies Federal government attempts to keep the economy healthy, including monetaryand fiscal policies (page 451)

unemployment rate Percentage of civilian labor force that is unemployed but is actively looking for work(page 452)

full employment An economic condition that occurs when the unemployment rate is lower than a cer-tain number established by economists’ studies (page 453)

underground economy Transactions conducted by people who do not follow federal and state laws withrespect to reporting earnings (page 453)

demand-pull inflation A theory that prices rise due to excessive business and consumer demand;demand increases faster than total supply, resulting in shortages that lead to higher prices (page 454)

stagflation Combination of inflation and low economic activity (page 455)

cost-push inflation A theory that prices are pushed up by wage demands of labor unions and the exces-sive profit motive of large corporations. The result is stagflation (page 455)

KEY TERMS

Reading Essentials and Study Guide 17–1

455

Page 454: 4B, 7A, 16A, 17C, 18B,23A, 23F-G, 24A

Page 455: 4A-B, 16A-B, 17C, 18B,23A, 23F, 24A, 26A


ECON: 16B, 23A

ECON: 23A

SPOTLIGHT

SPOTLIGHT ON THE ECONOMY

Employers across the country are facinga newly emboldened American work

force. We’re living through the tightest U.S.labor market in three decades—a hiringbonanza that is transforming the nature of

work. The current hypergrowth in jobscan’t last forever; fast-food restaurants

won’t be paying signing bonusesduring the next recession. But themost remarkable changes in theworkplace—and our attitudestoward it—will redefine careerswell into the 21st century. Just asthe Great Depression produceda generation of frugal worry-

warts, those of us benefitingfrom the long jobs boom of the

1990s sport an often brazen self-confidence about how we connect to our jobs. . . .

What is worth knowing? That moreAmericans are creating entirely new styles ofemployment. They’re found in the expandingranks of self-employed Free Agents who findfinancial and professional independence ineverything from personal training to urbanplanning. Or they are the new Nomads, workers

who never seem to stop jobhunting. There’s an emergingclass of Globalists, too—thosehave-laptop-will-travel workerswho straddle time zones in today’sborderless economy. . . .

The most striking—and frightening—feature of this new landscape is how much itdemands of us. Once expertise in a single disci-pline, like marketing, was enough to ensure asecure corporate future. But today’s free agentneeds skills in selling himself (how else todrum up business?), finance (to win that bankloan) and technology (is this computer upgradea wise investment?).—Reprinted from February 1, 1999 issue of Business Week by special

permission, copyright © 1999 by The McGraw-Hill Companies, Inc.

Think About It1. According to the article, why are workers so confi-

dent about their jobs?

2. How have the new styles of employment changedwhat is demanded of workers?

Check It Out! In this chapter you learned about the fourkinds of unemployment. In this article, read to learnhow the United States job market looked at the end ofthe twentieth century.

Your Next JobYour Next Job

456 CHAPTER 17

456

Encourage students to discussthe kinds of jobs they think will beavailable for them when they gradu-ate from high school or college. Askthem if they think they will workfor one company for several years,or if they think they will move fromcompany to company. Also, askthem what kinds of special skillsthey think they will need foremployment in the twenty-first century. Conclude by informingstudents that this feature reviewsthe ways that the job marketchanged in the 1990s.

Answers to Think About It

Technological developmentshave changed not only how peo-ple work, but also where theywork. A survey carried out in1999 found that 19.6 millionAmericans regularly worked athome at least one day per month.In 1990, only 4 million Americansregularly worked at home.

1. because there was a jobs boom throughout the 1990s2. In the past, expertise in a single discipline was enough to guarantee a successful

future. Now, workers must have skills in several areas.

To find up-to-date news andanalysis on the economy, busi-ness, technology, markets,entrepreneurs, investments,and finance, have studentssearch feature articles and spe-cial reports on the BusinessWeek Web site.www.businessweek.com

ECON: 23A, 23D

ECON: 23G, 26A-B

http://www.businessweek.com

457


Terms to Know• fiscal policy• circular flow of income

Reading Objectives1. How does income flow

between businesses andconsumers?

2. How can the federal gov-ernment use fiscal policy tocombat unemployment?

READER’S GUIDE

Most economists belong to one of two groups on thequestion of stabilization. One group emphasizes therole of the Federal Reserve in stabilizing the economy,

which you learned about in Chapter 15. In this section, you’lllearn that the other group concentrates more on the use of fiscalpolicy, the federal government’s deliberate use of its taxationrates and expenditures to affect overall business activity.

John Maynard KeynesJohn Maynard Keynes developed fiscal policy theories during

the Great Depression. Keynes believed that the forces of aggregatesupply and demand operated too slowly in a serious recession, andthat government should step in to stimulate aggregate demand.

2

fiscal policy: federal govern-ment’s use of taxation and spend-ing policies to affect overallbusiness activity

THE NEW YORK TIMES, JULY 14, 1999

For all the recent talk of cutting taxes, Congressrarely cuts them when the economy is growingrobustly, as it is now, and unemploymentis low. The worry among economists is

that the extra money in people’s pock-ets may make an already strongeconomy too strong, finally stokinginflation after a long period of rela-tively stable prices.




MultimediaDaily Focus Transparency 77Vocabulary PuzzleMaker CD-ROM Interactive Tutor Self-Assessment SoftwareExamView® Pro Testmaker

MindJogger VideoquizNBR’s Economics & You

Presentation Plus!


OverviewSection 2 outlines a simple

model of how income flowsbetween businesses and consumers,and discusses how Keynesian fiscalpolicy might be used to controlunemployment and inflation.


Preteaching VocabularyHave students work in small

groups to develop skits that illus-trate the term circular flow ofincome.

Vocabulary PuzzleMaker

READER’S GUIDE


Available as blackline master.


S TABILIZATION POLICIES

In the Words of John Maynard Keynes

1. According to Keynes, what things should government do?

2. Reread the second quotation. What might Keynes have felt was“extremely objectionable” about capitalism?

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do things which individualsare doing already, and todo them a little better or alittle worse: but to do thosethings which are at presentnot done at all.”

Ithink that Capitalism, wisely managed, can

probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself is in many ways extremely objectionable.”

In the long run we areall dead. Economists set

themselves too easy, toouseless a task if in tempes-tuous seasons they canonly tell us that when thestorm is long past theocean will be flat again.”

““

“



Page 456: 19D, 21A-B, 23A, 26A-BPage 457: 6A, 16A, 17C, 18B,

19A, 23A, 24A


ECON: 6A, 24A, 24D



circular flow of income: eco-nomic model that pictures incomeas flowing continuously betweenbusinesses and consumers

The Circular Flow of IncomeTo understand Keynesian theory, you must first understand

what is known as the circular flow of income. You learnedabout this model in Chapter 2. The model pictures income asflowing from businesses to households as wages, rents, interest,and profits. Income flows from households to businesses as pay-ments for consumer goods and services.

Not all income, however, follows this circular flow. Some of itis removed from the economy through consumer saving and gov-ernment taxation. Economists use the term leakage to refer tothis removal of money income. Figure 17.4 shows these leak-ages. Offsetting leakages of income are injections of income intothe economy. Injections occur through business investment andgovernment spending.

Consumers

Banks & OtherFinancial

Institutions

FederalGovernment

Businesses

LeakagesInjectionsPurchases of Goods and Services

Income (Wages, Rents, Interest, Profits)

The Circular Flow of Income

Taxe

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for

Investment

Savi

ng

Borrow

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GovernmentSpending

(Purchases of Goods & Services,

Interest)

Government Spending

(Wages, Transfer Payments,

Interest)GovernmentBorrowing

Circular Flow Government occupies a central position in the circular flow ofincome. By using fiscal policy, the federal government partially controls the levels of leak-ages and injections. This, in turn, may control the overall level of economic activity.


CHAPTER 17458

458


T HE FISCAL POLICY APPROACH TO STABILIZATION

OUTLINING

Directions: Locate the heading in your textbook. Then use the information under the heading to help youwrite each answer.

I. John Maynard Keynes

A. Introduction

1. What is fiscal policy?

2. What did John Maynard Keynes believe about serious recessions?

II. The circular Flow of Income

A. Introduction

1. How does the circular flow of income work?

2. What factors of production do households control?

3. What are examples of economics leakages and injections of the economy?

Name Date Class

17-2


L ECTURE LAUNCHERLDuring 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 fiscalpolicy?

I. John Maynard Keynes

John Maynard Keynes believed that forces of aggregate supply and demand operated tooslowly in a serious recession and that the government should step into to stimulateaggregate demand.


Summarize the economic theory of John Maynard Keynes. (Answers will vary, butshould include the idea that in a serious recession the government should use fiscal policymeasures to stimulate aggregate demand.)

II. The Circular Flow of Income

A. Income flows from business to households in form of wages, rent, interest, and profits.

17-2

PAGES 458–459

PAGE 457


Hearing and Speech Disabilities Students with hearing or speech problems may beconcerned about making oral presentations to the class. Encourage these students to useposters, charts, graphs, and other visuals to supplement their presentations and createconfidence in their ability to explain what they know.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities forstudents with different learning styles.


Guided PracticeL2 Understanding Ideas Write theterms unemployment and inflation onthe board. Call on students to iden-tify the fiscal policy actions the gov-ernment can take to fight these twoconditions. Enter their responsesunder the appropriate term. Thenhave students use the informationon the board to write a brief essaytitled “Stabilizing the Economy—TheFiscal Policy Approach.”ECON: 16A, 17C, 23A, 24D

ECON: 24D

459


FRANK & ERNEST

Ideally, leakages and injections balance each other. See Figure17.5. In this state of equilibrium, the income that householdssave is reinjected through business investment. Income taken outthrough taxes is returned through government spending.

Fiscal Policy and UnemploymentMany public officials and labor leaders have suggested starting

jobs programs to reduce unemployment and stimulate the econ-omy. Several suggestions for forming new government-sponsoredjobs programs to bring down unemployment rates were made inthe early 1980s and again in 1992 and 1993.

Cuts in federal taxes are another way in which fiscal policyhas been used in an attempt to speed up economic activity andfight unemployment. Giving businesses tax credits on invest-ments allows them to deduct from their taxes some of the costsof new capital equipment. The goal is to encourage businesses to expand production and hire more workers.

Fiscal Policy and InflationFiscal policy supporters also believe that inflation can be

reduced by such government actions as increasing taxes and/orreducing government spending. They argue that such actions willreduce the aggregate demand for goods and services. Because peo-ple are paying higher taxes, they are taking home less spendableincome and so must cut back on their purchases. As purchases

Equilibrium The customer above is unhappy that his income and outgoare in equilibrium. Keynesian economists, however, want injections and leak-ages (income and outgo) to balance in the circular flow of economic activity.

17.517.5

FRANK & ERNEST reprinted by permission of Newspaper Enterprise Association, Inc.



IndependentPracticeL2 Illustrating Ideas Organize stu-dents into groups, and tell them toprepare an information brochure—suitable for ninth grade students—titled “Fiscal Policy: What It Is, WhatIt Does.” Call on group representa-tives to present and discuss theirbrochures.

ECONOMICS & YOU



ASK: What is the goal ofKeynesian economics? Itargues for more governmentinvolvement in the economy dur-ing recessions. The hope is thatwith more people working due togovernment projects, demand forproducts will increase and stimu-late the economy.


Fiscal Policy and the Great Depression Keynesian economists believe that the GreatDepression resulted from a serious imbalance of leakages and injections. In the monthsfollowing the stock market crash of 1929, the desire and ability of businesses to invest col-lapsed, reducing output and causing a high rate of unemployment. According to Keynesiantheory, government should have filled the gap created when businesses began limitingtheir investments. The government could have increased injections of government spend-ing or cut taxes. Either action would have given businesses and consumers more dispos-able income.

Extending the Content




Page 458: 4B, 6A-B, 17C, 23A, 23F,24A

Page 459: 4B, 15A, 16A, 17C, 19A


ECON: 19C, 23A, 24D

ECON: 4B, 15A, 17C, 19A, 19C



460 CHAPTER 17

Jobs programs were created by the federal government during the 1930s.

The Federal Art Project employed artists todepict American history and everyday life inpublic buildings. These artists created morethan 2,500 murals and 17,700 sculptures.

The Federal Writers Project employedwriters who worked on many different publi-cations. The best known was the AmericanGuide series—tour guides that included infor-mation on the history, geography, industry,and culture for each of the 48 states. ■

Economic Connection to...Economic Connection to...


Jobs Programs

decline, businesses will cut back on production. Thisreduction in demand will cause businesses to recon-sider raising prices, thus curbing inflation.

Often, however, as inflation falls, unemploymentrises slightly because of less business activity.Therefore, fiscal policy as a means of reducing inflation has not beenused frequently.

Understanding Key Terms1. Define fiscal policy, circular flow of income.

Reviewing Objectives2. Graphic Organizer Create a diagram like the

one below to show what types of income flowfrom businesses to consumers in the circular flow.

3. How can the federal government use fiscal policy to combat unemployment?

Applying Economic Concepts4. Fiscal Policy Explain how the government pol-

icy of increasing federal, state, or local taxescould eventually lower inflation.

Businesses Consumers



2

5. Evaluating Primary and SecondarySources Research the Depression-era writings of Studs Terkel and photographs ofDorothea Lange. Write a report describingthe economic conditions of the early 1930sand what actions you think the governmentshould have taken to ease the crisis.

History

CCC and WPA posters

Jobs Programs

460

ReteachHave students outline the major

aspects of the circular flow ofincome, fiscal policy and unemploy-ment, and fiscal policy and inflation.

1. All definitions can be found in the Glossary.2. See Figure 17.4 on page 458 for diagram

ideas and content.3. The government might combat unemployment

by creating new jobs programs or by cuttingtaxes. Both approaches are designed to stimu-late the economy and, by doing so, reduceunemployment.

4. If people are paying higher taxes, they haveless income available to make purchases. Aspurchases decline, businesses will cut back onproduction and reduce prices.

5. Encourage students to share and discuss theirreports with the rest of the class.

Have students discuss the kindsof policies Keynesian economistsmight suggest for the present eco-nomic situation in the UnitedStates.

Name Date Class

17, 2

fiscal policy The federal government’s use of taxation and spending policies to affect overall businessactivity (page 457)

circular flow of income An economic model showing the continuous flow of income between businessesand consumers (page 458)

For use with textbook pages 457–460

T HE FISCAL APPROACH TO STABILIZATION


Where do employers get the money to pay your wages? If you answered “From the goods orservices they sell,” you are right. You also are beginning to understand the circular flow ofincome. When you spend money, you help keep other people employed. Understanding theseexchanges over the entire economy is central to understanding the fiscal approach to economicstabilization.

In this section, you will learn that some economists believe fiscal policies can stabilize the economy.

ORGANIZING YOUR THOUGHTS

Use the circular flow model below to take notes on the summaries that follow. Be sure to under-stand the fiscal approach to promote economic stability.

Simple Circular Flow

KEY TERMS


Name Date Class

17, 2

T HE FISCAL POLICY APPROACH TO STABILIZATION

Multiple Choice: In the blank at the left, write the letter of the choice that best completes the statement or answers the question. (10 points each)

6. Keynesian economists believe that the Great Depression resulted from

a. a circular flow of income. b. an equilibrium.c. an imbalance in leakages and injections. d. unemployment.

7. Income that is removed from the economy through consumer savings is called

a. an injection. b. an imbalance.c. a leakage. d. an equilibrium.

SCORE

A1. fiscal policy

2. circular flow of income

3. equilibrium

4. leakages

5. injections

Ba. removal of money income from the economy

b. economic model that pictures income as flowingcontinuously between businesses and consumers

c. state of the economy in which leakages and injections balance each other

d. federal government’s use of taxation and spendingpolicies to affect overall business activity

e. flow of income into the economy


Section Quiz 17–2

ECON: 6A-B, 15A, 17C, 23A

ECON: 19A, 23D

Critical Thinking Skills

461


Have you ever read something and just a short time later forgotten what it was all about? Summarizinginformation—reducing many sentences to just a few well-chosen phrases—helps you remember the mainideas and important facts contained in a longer reading selection.

Critical Thinking Skills

Practicing the SkillRead the excerpt below, then answer the questions.

“Tomorrow’s school, it turns out, may remind parentsmore of a sleek shopping mall than of the long, chalk-choked corridors of their youth. Retailers and health clubsof today ‘have got it figured out,’ says Paul Hansen, theprincipal architect in charge of a $118 million retrofit ofSandburg High School [Chicago]. The new Sandburg willincorporate some of the hottest ideas in school design: acentral library that resembles a Barnes & Noble super-store, a gym with updated amenities like a rock-climbingwall, and a food court to replace the cafeteria. . . . Schoolsof the future will be wired to the hilt. Fiber optics, inter-nal computer networks, videoconferencing, and the likeare musts.”—Newsweek, December 14, 1998

1. What is the main idea of this paragraph?2. What are the supporting details of the main idea?3. Write a short summary that will help you remember

what the paragraph is about.

Application ActivitySpend 15 minutes reading and summarizing two

articles on the front page of today’s newspaper. Circlethe articles and have a classmate ask you questionsabout them. How much were you able to rememberafter summarizing the information?

Summarizing Information

• Your summary should bemuch shorter than thereading selection.

• Your summary shouldcontain the main ideas ofthe reading selection.

• Your summary should notcontain your opinion. Itshould contain only theopinion of the personwho wrote the selection.

• Your summary sentencesand phrases should notbe copied word for wordfrom the selection. Write asummary in your ownwords to be sure that youunderstand the mainideas of the selection.



Learning the SkillTo learn how to summarize information, follow the

guidelines listed on the left.

Summarizing InformationReview the guidelines provided

in the Learning the Skill section.Working with students, apply theseguidelines to the paragraphs underthe title “The Circular Flow ofIncome” on pages 458 and 459.Remind students that they shouldinclude information from visuals intheir summaries. Then assist stu-dents as they work through thePracticing the Skill activity.

Glencoe SkillbuilderInteractive Workbook,Level 2

This interactive CD-ROM rein-forces student mastery of essen-tial social studies skills.

Answers to Practicing the Skill1. Schools of tomorrow will be more like shopping malls than traditional schools.2. 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 acafeteria.

3. Summaries will vary. Ensure that students follow the guidelines when writing theirsummaries.

Application Activity You may want to hand out copies of a current newspaper articleand have students practice summarizing the information in class.

S UMMARIZING INFORMATIONSummarizing information helps you to remember the main ideas and important facts con-tained in a long reading selection. To write a summary, rewrite the main ideas of the readingselection in your own words. Do not copy sentences or phrases from the text. Make sure yoursummary is much shorter than the reading selection, but captures the selection’s main ideas.

Directions: Read the remarks below from the chairman of the Federal Reserve Board, Alan Greenspan.Then, on a separate sheet of paper, answer the questions that follow.

At the root of this expansion of economic activity has been a marked increase in the productivity of the nation’s workforce. Increases in productivity allowed real wages to rise and the economy to grow. It is this acceleration of productivity over recent years that has explained much of the surprising combination of a slowing in inflation and sustained rapid real growth.

American industry, quite generally, has shared an improved level of efficiency and cost containment through high-techcapital investment, and not solely in newer industries at the cutting edge of innovation. Our century-old motor vehicleindustry, for example, has raised output per hour by a dramatic 4.5 percent annually on average in the past two years,compared with a lackluster 1.25 percent on average earlier this decade. Much the same is true of many other matureindustries, such as steel, textiles, and other stalwarts of an earlier age. This greater ability to pare costs, increase pro-duction flexibility, and expand capacity are arguably the major reasons why inflationary pressures have been held incheck in recent years.

1. What is the main idea of this passage?

2. What facts does the author provide to support the main idea?

Name Date Class

13

Reinforcing Economic Skills 13

Page 460: 6A,15A-B, 17C, 19C,23A-B, 23D, 23F, 24A

Page 461: 23A, 24B


ECON: 23A




MultimediaDaily Focus Transparency 78Vocabulary PuzzleMaker CD-ROM Interactive Tutor Self-Assessment SoftwareExamView® Pro Testmaker

MindJogger VideoquizInteractive Economics!Presentation Plus!


monetarism: theory that dealswith the relationship between theamount of money the Fed placesin circulation and the level ofactivity in the economy

monetarists: supporters of thetheory of monetarism, oftenlinked with Milton Friedman

462 CHAPTER 17

Terms to Know• monetarism• monetarists• monetary rule• time lags

Reading Objectives1. What do monetarists think

the government and theFed should do to stabilizethe economy?

2. Why do monetarists criti-cize fiscal policy?

READER’S GUIDE

In this section, you’ll learn about monetarism, the theory thatdeals with the relationship between the amount of money theFederal Reserve places in circulation and the level of activity in

the economy. The supporters of this theory are called monetarists.

The Theory of MonetarismMonetarism is often linked with economist Milton Friedman

(see page 466). As you remember from Chapter 15, the FederalReserve can change the growth rate of the money supply.Friedman and many other economists believe that the Fed

THE ECONOMIST, AUGUST 10, 1996

Have monetary policymakers got [inflation] licked?Central bankers will tell you that they have not, and

not just out of modesty. Although plenty of them havetargets for inflation, none is sure precisely how, or howrapidly, changes in monetary policy affect the economy.So they cannot be certain that a sensible-looking interest-rate cut will not revive inflation—or that a cautious-looking rise will not tip the economy into recession.

Hence the search for . . . a simple rule for choosing [a] monetary policy that keeps inflation down without hitting the economy too hard.

3

462

OverviewSection 3 explains the theory of

monetarism, discusses the mone-tarist approach to government policy, and reviews monetarist criticisms of fiscal policy.


Preteaching VocabularyAsk students to use the four

Terms to Know in an imaginarynews story about the economy.

Vocabulary PuzzleMaker

READER’S GUIDE


Available as blackline master.


E CONOMICS AND POLITICS

1. What are the three types of fiscal policy?

2. Which type of fiscal policy requires a conscious decision andaction?

DiscretionaryFiscalPolicy

PassiveFiscalPolicy

FiscalPolicy

StructuralFiscalPolicy

7878

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463

should increase the money supply at a smooth, given percenteach year. They argue that when the amount of money in circula-tion expands too rapidly, people spend more. If the economy isoperating below capacity, this extra demand will lead to a rise in output. To produce more, businesses will have to hire moreworkers, and unemployment will decrease. If there is already fullemployment, however, the increased aggregate demand will leadto a rise in prices—inflation.

Government PolicyAccording to Monetarists

Friedman and his monetarist followers believe the economy isso complex and so little understood that government does moreharm than good in trying to second-guess businesspeople andconsumers. As a result, monetarists generallyoppose using fiscal policy to stimulate or slowthe economy.

For example, they do not believe the govern-ment should operate with budget deficits eachyear in an attempt to stimulate the economy.Instead, monetarists believe that the governmentshould balance the federal budget. This actionwould keep government from competing withprivate business to borrow money in the creditmarket. It would also reduce the amount of inter-est that the government must pay each year.

The Fed, according to monetarists, shouldalso stop trying to smooth the ups and downsin the economy. Rather, the Fed should follow amonetary rule, or allow the money supply togrow smoothly and consistently at a rate of per-haps 3 to 5 percent per year. Monetaristsbelieve that a steady growth in the money sup-ply within strict guidelines (or targets, as theyare called) is the best way to provide businesses and consumerswith more certainty about the future. According to monetarism,this policy would result in a controlled expansion of the economywithout rapid inflation or high unemployment.

Monetarist Theory and the Federal Reserve Monetaristtheory had a major influence on Federal Reserve policies in the1980s. You can trace the changing monetary policies of the Fedin Figure 17.6 on page 464.

Job Description■ Assist families

dealing withunemployment,illness, or seri-ous conflicts

■ Refer clients tospecialists

Qualifications■ Bachelor’s

degree insocial work

■ State licensingcertification

CAREERSSocial Worker

—Occupational Outlook Handbook, 2000–01

Median Salary: $30,590

Job Outlook: Above average


monetary rule: monetarists’belief that the Fed should allowthe money supply to grow at asmooth, consistent rate per yearand not use monetary policy tostimulate or slow the economy



Name Date Class


ONETARISM AND THE ECONOMY

RECALLING THE FACTS

Directions: Use the information in your textbook to answer the questions.

1. What is monetarism?

2. What do monetarists, such as Milton Friedman believe the Fed should do each year?

3. How do monetarists believe the Great Depression could have been solved?

4. What did the reduction of the amount of money in the economy do in the 1930s?

5. How do monetarists view the government’s use of fiscal policy?

6. Why do monetarists believe the government should balance the federal budget?

17-3

M


L ECTURE LAUNCHERLIs e-money a friend or foe to monetarism? For most of the century the Federal Reserve hashad a monopoly of hard currency. But, in principle, e-money could one day replace FederalReserve Notes and fully privatize the money stock. Will self-regulating e-money provide a newand improved alternative to central-bank discretionary powers? With $100 billion of FederalReserve notes in circulation, monetarists still have a long time to evaluate this question anddevise new methods for controlling the money supply. What is monetarism and what is theultimate goal of monetarist policy?

I. The Theory of Monetarism

A. States that the Fed should increase the money supply at a smooth, given percent peryear.

B. If the economy operates below capacity, the extra demand that results from theincrease in the money supply will lead to a rise in output.

C. Businesses will hire more workers and unemployment decrease.

D. If there is full employment, however, the increased demand will lead to inflation.


Do you think the theory of monetarism is sound? (Answers will vary, but students shoulddemonstrate an understanding of the theory and its applications for the economy.)

17-3

PAGES 462–463


Study Strategy To help build discussion skills for gifted students, appoint two or threestudents to plan and lead a class or panel discussion on the different approaches of fiscalpolicy and monetary policy. Be sure that students limit the focus of the discussion and takeinto account the class time available.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities forstudents with different learning styles.


Guided PracticeL1 Illustrating Ideas Draw a largecircle on the board. To the side, writethe following labels: Fed increases themoney supply. Consumers have morecash. Demand for goods and servicesincreases. Businesses increase outputby hiring workers. At full employment,prices rise (inflation). Call on volun-teers to write these labels and arrowson the circle to show the impact ofincreased money supply on aggre-gate demand and inflation.

Page 462: 18B, 19A, 23A, 24APage 463: 17B-C, 18B, 19A, 24A


ECON: 18B, 23A, 23F

ECON: 17C, 18B, 23A



CHAPTER 17

Monetarists’ Criticismof Fiscal Policy

Monetarists believe that the theory of fiscal policy nevermatches the reality of fiscal policy. Two reasons account for thisdiscrepancy. The first reason concerns the political process of fis-cal policy. Monetarists point out that no single government body

Changing Fed Policies To monetarists, the reduction in the amount of money in cir-culation can mean only one thing—a reduction in aggregate demand. With less aggregatedemand, fewer workers are needed and unemployment increases. What happened to theunemployment rate when Fed policies began to lower inflation from 1980–1982?


464

Sources: Economic Report of the President, 1999; Bureau of Economic Analysis

1970 1980 1990 2000

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Changing Monetary Policies of the Fed

Fed concentrates on interestrates rather than on themoney supply. In 1979, withinflation high, policy shifts.

Fed continues with a so-calledtactical monetary policy,allowing the rate of growthof the money supply to changedepending on other factors inthe economy. The federal fundsrate is targeted as a way toincrease or decrease the rateof growth of the money supply.Inflation slows dramatically bythe end of the century.

Monetarist policy begins. Fed keeps rate of growth ofmoney supply within targetsand ignores interest rates.Inflation drops, but unem-ployment increases. In 1983,policy changes again.Strict monetarism ends.

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IndependentPracticeL2 Drawing Cartoons Direct stu-dents to create cartoons supportingor opposing monetary policiesdesigned to stabilize the economy.Call on volunteers to display andexplain their cartoons.

BLOCK SCHEDULINGELL

Answer: unemployment rose

LESSON 7: FISCAL POLICYHave students study the

“Tutorial.” Students will learn howthe federal government plays bothan indirect and a direct role in theeconomy.

Supplied in both CD-ROM anddisk formats.

Monetary Policy and the Great Depression Monetarists view the Great Depression differently from Keynesian economists. Monetarists do not deny that a lack of businessinvestment in the early 1930s reduced aggregate demand. However, they feel that the fallin aggregate demand resulted from the reduced amount of money in circulation. Accordingto monetarists, the Fed should have greatly increased the amount of money in the econ-omy. Instead, the steps taken by the Fed cut the money supply by one-third between 1929and 1933. By its actions, the monetarists claim, the Fed turned what would have been justanother recession into an economic disaster.

Extending the Content




ECON: 16A, 18B, 23A, 23D, 24D

ECON: 18B, 19A, 19C

465465


time lags: periods between thetime fiscal policy is enacted andthe time it becomes effective

designs and implements fiscal policy. The President, with the aidof the director of the Office of Management and Budget (OMB),the secretary of the Treasury, and the Council of EconomicAdvisers, designs yet only recommends the desired mix of taxesand government expenditures.

Congress, with the aid of many committees (the House Waysand Means Committee, the Senate Finance Committee, and theSenate Budget Committee, to name a few), actually enacts fiscalpolicy. One built-in organizational problem is that the power toenact fiscal policy does not rest with a single government institu-tion. Disagreement as to the proper fiscal policy emerges amongmembers of Congress and between Congress and the President.Furthermore, being politicians, they have incentives to takeactions that will look good today and help them get reelected, butwhich may hurt the economy in the long run.

Monetarists also point out that even if fiscal policy could beenacted when the President wanted, there are various time lagsbetween when it is enacted and when it becomes effective. Ittakes many months, if not years, for fiscal policy stimuli to causeemployment to rise in the economy. Consequently, a fiscal policydesigned to combat a recession might not produce results untilthe economy is already experiencing inflation. In this event, thefiscal policy could worsen the situation.

Understanding Key Terms1. Define monetarism, monetarists, monetary

rule, time lags.

Reviewing Objectives2. Graphic Organizer Create a diagram like the

one below to analyze what monetarists think thegovernment and the Fed should do to stabilizethe economy.

3. Why do monetarists criticize fiscal policy?

Applying Economic Concepts4. Monetarism Do you agree or disagree with

the theory of monetarism? Explain yourresponse.

StableEconomy

5. Making Comparisons Describe in yourown words the difference between mone-tarism and monetary policy. Share yourdescription with a classmate, making sure he or she understands the difference.




3



ReteachHave students review the section

content by outlining the chiefaspects of monetarism and mone-tary policy.

1. All definitions can be found in the Glossary.2. Government should balance the federal

budget; the Fed should follow a monetary rule.3. because, according to monetarists, the econ-

omy is too complex for fiscal measures to suc-cessfully adjust investment or spending

4. Ensure that students offer valid reasons fortheir answers.

5. Monetarism is the theory that deals with therelationship between the amount of money incirculation and economic activity, whereasmonetary policy is the action taken by the Fedto increase or decrease the money supply.

Have students debate which theythink is more effective in stabilizingthe economy—fiscal policy or mone-tary policy.

Name Date Class

17, 3

monetarism A theory that deals with the relationship between the amount of money the Fed places incirculation and the level of activity in the economy (page 462)

monetarists Supporters of the theory of monetarism linked with economist Milton Friedman (page 462)

monetary rule Fed rule that would allow the money supply to grow consistently at a rate of 3 to 5 per-cent per year

time lags These are periods between the time fiscal policy is enacted and the time it becomes effective(page 465)

For use with textbook pages 462–465

M ONETARISM AND THE ECONOMY


Have you or a member of your family ever looked at interest rates before you made a major pur-chase? Did a higher or lower interest rate affect your decision to make a large purchase, such as ahouse or a car? Did the interest rate on a credit card ever affect your decision or a family mem-ber’s decision to make a purchase with that card? Monetarists believe that understanding suchdecisions is important to creating economic stability.

In the last section, you learned about the fiscal approach to economic stability. This section willintroduce you to a competing stabilization theory called monetarism, which deals with the rela-tionship between the amount of money the Federal Reserve places in circulation and the level ofactivity in the economy.

KEY TERMS


M ONETARISM AND THE ECONOMY

Multiple Choice: In the blank at the left, write the letter of the choice that best completes the statement or answers the question. (10 points each)

6. Which of the following is part of Milton Friedman’s theory about stabilizing the economy?

a. when the amount of money in circulation b. when the amount of money in circulationexpands, people spend more expands, people spend less

c. Fed should not regulate the nation’s money d. Fed should use taxation as a way of stabilizingsupply the economy

7. Monetarist theory

b

SCORE

A1. monetarism

2. monetarists

3. monetary rule

4. time lags

5. fiscal policy

Ba. government use of taxation and spending to affect

overall business activity

b. periods between the time fiscal policy is enactedand the time it becomes effective

c. supporters of the theory of Milton Friedman

d. theory that deals with the relationship between theamount of money the Fed places in circulation andthe level of activity in the economy

e. belief that the Fed should allow the money supplyto grow at a consistent rate per year


Name Date Class

17, 3

Section Quiz 17–3

Page 464: 16A-B, 17C, 18B, 23A,23F-G

Page 465: 16A, 17C, 18B, 19A,23A, 23D, 23F, 24A


ECON: 11C, 18B, 23A, 23D

ECON: 18B, 23A

■ Won Nobel Prize forEconomics in 1976

■ Leading supporterof monetarism

■ Publications includeThe MonetaryHistory of the U.S.1867–1960 withAnna J. Schwartz(1963), Capitalismand Freedom (1962),and Free to Choosewith Rose Friedman(1980)

Milton Friedman has writtenextensively on the mone-

tary history of the United States.Here, Friedman explains why hedoes not approve of the Fed andgives a possible alternative solu-tion to regulating the moneysupply:

“The establishment of theFederal Reserve System . . . estab-lished a separate official bodycharged with explicit responsibilityfor monetary conditions, and sup-posedly clothed with adequatepower to achieve monetary stabil-ity or, at least, to prevent pro-nounced instability. It is thereforeinstructive to compare experienceas a whole before and after itsestablishment—say, from just afterthe Civil War to 1914 and from1914 to date.

. . . The stock of money, prices,and output was decidedly moreunstable after the establishment ofthe Reserve System than before. . . .

. . . Any system which gives somuch power and so much discretion

to a few men that mistakes—excusable or not—can have suchfar-reaching effects is a bad system.It is a bad system to believers infreedom just because it gives a fewmen such power without any effec-tive check by the body politic—thisis the key political argumentagainst an ‘independent’ centralbank.

. . . My choice at the momentwould be . . . instructing the mone-tary authority to achieve a speci-fied rate of growth in the stock ofmoney. . . . I would specify that theReserve System shall see to it thatthe total stock of money so definedrises . . . at an annual rate of Xpercent, where X is a numberbetween 3 and 5.”Checking for Understanding

1. What is Friedman’s argument againstan “independent” central bank?

2. What rule does Friedman propose togovern decisions of the FederalReserve System?

Milton FriedmanECONOMIST (1912—)

466

466

BackgroundMilton Friedman has been called

a modern Adam Smith because ofhis support for free market competi-tion and his opposition to govern-ment intervention in the economy.He has been particularly critical ofthe Federal Reserve System.

Answers to Checking for Understanding1. It gives a few people too much power without any checks.2. Friedman proposes a legislated rule instructing the monetary authority to achieve a

specified rate of growth in the stock of money.

Call on volunteers to read aloudthe excerpts from Capitalism andFreedom. Encourage students towrite a summary of the pointsmade by Friedman in the excerpts.Then have students answer theChecking for Understandingquestions.

ECON: 17C, 18B, 19A

ECON: 19A, 23C

467


C H A P T E R 17

Unemployment and Inflation

• Two of the biggest threats to the nation’s economicstability are high unemployment and inflation.

• Maintaining a low unemployment rate is a goal ofstabilization policies.

• The four types of unemployment are cyclical, struc-tural, seasonal, and frictional.

• According to the theory of demand-pull inflation,prices rise because excessive business and con-sumer demand increases faster than total supply.

• The theory of cost-push inflation states that thewage demands of labor unions and the excessiveprofit motive of large corporations push up prices.

The Fiscal PolicyApproach to Stabilization

• Some economists believe economic stabilizationcan be met with fiscal policy—the federal govern-ment’s deliberate use of taxation and spending toaffect overall business activity.

• John Maynard Keynes developed fiscal policy theo-ries during the Great Depression.

• Keynesian theory states that leakages out of andinjections into the circular flow of income affectaggregate demand, and should be counteracted bygovernment taxing and spending policies.

• To bring down unemployment, Keynesian econo-mists believe in forming government-sponsoredjobs programs and cutting federal taxes.

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 witheconomist Milton Friedman.

• Friedman and his supporters believe that the Fedshould follow a monetary rule by increasing themoney supply at a smooth, given percent per year.

• Monetarists criticize fiscal policy because of thepolitical arena in which it is developed, and becausetime lags between enactment and implementationof fiscal policies may worsen the situation.

Chapter Overview Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 17—Chapter Overviewsto review chapter information.

SECTION 1

SECTION 2

SECTION 3

Use the Chapter 17 Summary to preview, review, condense, orreteach the chapter.

Preview/ReviewVocabulary PuzzleMaker

CD-ROM reinforces the key termsused in Chapter 17.

Interactive Tutor Self-Assess-ment Software allows students toreview Chapter 17 content.

CondenseHave students listen to the

Chapter 17 Audio Program (alsoavailable in Spanish) in the TCR.Assign the Chapter 17 Audio Pro-gram Activity and give students theChapter 17 Audio Program Test.

ReteachHave students com-

plete Reteaching Activity 17 in theTCR (Spanish Reteaching Activitiesare also available).

C H A P T E R 17

ECONOMICS & YOU




Economic Stability Direct students to keep track of the references to U.S. unemploy-ment and inflation that they see in newspapers and magazines or on television for at leasta week. For each entry, have students note whether the economic news is positive or neg-ative. Have students use their recorded information to write a brief status report on theeconomy. Suggest that they answer the following questions in their reports: What is thetrend of inflation—up or down? What is the trend for unemployment?

Economics Journal

Page 466: 18A-B, 19A, 23A, 23DPage 467: 4A, 6A-B, 7A, 15A, 16A,

17C, 18B, 19A, 23A,24A


ECON: 16A-B, 23A, 23C


CHAPTER 17Assessment and ActivitiesCHAPTER 17

Assessment and Activities

Identifying Key TermsWrite a one-sentence explanation of each of thefollowing terms.

1. unemployment rate2. full employment3. underground economy4. demand-pull inflation5. stagflation6. cost-push inflation7. fiscal policy8. monetarism9. monetary rule

10. time lags

Recalling Facts and IdeasSection 1

1. What are the four types of unemployment?2. What causes demand-pull inflation?3. What causes cost-push inflation?

Section 24. What are the leakages out of the circular

flow of income?

5. What are the injections of income into thecircular flow of income?

6. What do Keynesian economists think thefederal government should do to reduceunemployment?

Section 37. Who is the economist most often linked to

monetarism?8. What do monetarists believe the Fed

should do in terms of monetary policy?

Thinking Critically1. Making Generalizations Analyze why full

employment cannot be defined as zerounemployment.

2. Understanding Cause and Effect Create adiagram like the one below to explain whythe unemployment rate might rise if fiscalpolicy were used to combat inflation.

TechnologyActivityUsing the Internet Choose a contemporaryeconomic issue such as unemployment orinflation to investigate. Using a searchengine, type in unemployment or inflation tolocate current statistics on your chosentopic. Visit a government Web site to learnabout the most up-to-date statistics. Write aone-page summary of your findings.

17

Self-Check Quiz Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 17—Self-Check Quizzesto prepare for the Chapter Test.

468 CHAPTER 17

468

Identifying KeyTermsSample sentences:1. The unemployment rate is the

percentage of the civilian laborforce that is unemployed butactively looking for work.

2. Full employment is a conditionin which the unemployment rateis lower than a certain percent-age—usually 5 percent—estab-lished by economists.

3. The underground economyinvolves transactions by peoplewho do not follow federal orstate laws with respect to declar-ing earnings.

4. Demand-pull inflation resultswhen demand increases fasterthan total supply.

5. Stagflation exists when there isa combination of inflation andlow economic activity.

6. Cost-push inflation results whenworkers’ wage demands and theexcessive profit motive of largecorporations push up prices.

7. Fiscal policy is the government’suse of taxation and spendingprograms to affect overall busi-ness activity.

8. Monetarism is a theory dealing with therelationship between the amount ofmoney in circulation and the level of eco-nomic activity.

9. Monetarists feel that the Fed should followa monetary rule, allowing the money sup-ply to increase by a set amount each year.

10.The period between when fiscal policy isenacted and when it takes effect is called atime lag.

Recalling Facts and Ideas1. cyclical, structural, seasonal, frictional2. excessive business and consumer demand3. workers’ excessive wage demands and

excessive profit motive of large corporations4. consumer saving, government taxation5. business investment, government spending6. increase government spending and cut

taxes7. Milton Friedman

Have students visit theEconomics Today and TomorrowWeb site at ett.glencoe.com toreview Chapter 17 and take the Self-Check Quiz.

MindJogger Videoquiz

Use MindJogger to reviewChapter 17 content.

tx.ett.glencoe.com

http://www.glencoe.com/qe/qe59.php?qi=1558&ch=17

http://www.glencoe.com/qe/qe59.php?qi=1558&ch=17

CHAPTER 17Assessment and ActivitiesCHAPTER 17

Assessment and Activities

469


ApplyingEconomic ConceptsUnanticipated Versus Anticipated InflationUnanticipated inflation may affect you inmany ways. For example, when inflation ishigh, banks charge higher interest rates tocompensate for inflation. If you borrowedmoney at the high interest rates and then therate of inflation fell, you would be worse off.You would be paying too much interest onthat borrowed money. Make a list of otherproblems that you might encounter if therewere a change in the rate of inflation that youdid not anticipate.

Reviewing SkillsSummarizing Information Read the excerptbelow, then answer the questions that follow.

“In recent years—as the second-longesteconomic expansion on record has spread itsimpact—most of the country has experienced ashortage of workers.

What’s most perplexing is this: Tight labormarkets are not affecting the economy the waytextbooks say they should.

Normally, in the organic life of an economy,tight labor leads to higher wages, which triggersinflation, which leads to higher interest rates,which cause the economy to slow, which theneases the demand for labor.

For years now, economists have expected thischain of events to play out. But the scenario hasbeen nipped from the start. Tight labor has notled to spiraling wages.”—The Columbus Dispatch, August 23, 1999

1. According to the article, what should hap-pen when there is a shortage of workers?

2. Summarize what the article states aboutthe economy.

CooperativeLearning Project

Organize into four groups. The first threegroups will each track one of the following:government fiscal policies, monetary policies,and major economic indicators. The lastgroup will create visuals from the informa-tion that is collected.

Using the front page of 10 consecutiveissues of the Wall Street Journal, three groupswill record a summary of news in each of theircategories. Fiscal policy includes taxes and gov-ernment spending. Monetary policy includescentral bank interest rates, money supply,open-market operations, and reserve require-ments. Economic indicators include suchmeasurements as the consumer price index,industrial production, producer prices, retailsales, stocks and bonds, and unemployment.Each item should include the category, the dateof the news, and a brief summary of the news.

As the information is being gathered bythe first three groups, the last group shouldbegin creating headlines that place the eventsin chronological order on a bulletin board. Toconclude this project, the class should dis-cuss the state of the economy as reflected inthe headlines.

Scan the international section of a news-paper or business magazine. Keep track ofthe number of times that you read about thetopics of unemployment and inflation inother countries. Create a table listing thespecific countries and the specific topics.After each entry, indicate whether the eco-nomic news was positive or negative.

Technology ActivitySummaries will vary.

Applying EconomicConcepts

Answers will vary.

Reviewing Skills1. A shortage of workers leads to

higher wages. This, in turn, trig-gers inflation, which leads tohigher interest rates. As a result,the economy slows and thedemand for labor eases.

2. Summaries will vary but shouldnote that the usual economicresult of labor shortages has notdeveloped.

CooperativeLearning Project

After discussing the state of theeconomy, students might extrapo-late any implications the newsitems have for the future of theeconomy.

Analyzing theGlobal Economy

Call on volunteers to share anddiscuss their findings.

ASK: What fiscal policiesmight be enacted to deal withunemployment? Fiscal policieswould include increased govern-ment spending and tax cuts tostimulate the economy.

Chapter BonusTest Question

8. Follow the monetary rule and allow themoney supply to grow at a constant rateof between 3 and 5 percent each year.

Thinking Critically1. Unemployment will always occur because

people lose their jobs, leave jobs to furthertheir education, or change jobs. Also, somepeople work at jobs that are seasonal innature. Further, technological develop-

ments may make certain jobs obsolete,leaving some workers unemployed.

2. Diagrams may include: Government wouldraise taxes and/or reduce spending. Thiswould reduce the aggregate demand forgoods and services. Consumers wouldtake home less spendable income.Therefore, they would cut back on spend-ing, causing businesses to cut back on pro-duction. The slowdown in productionwould probably cause unemployment.

Page 468: 4A, 6A-B, 7A, 16B,17B-C, 18B, 19A, 23A,23C-D, 23F, 24A-D, 27A

Page 469: 1B, 8B, 11A, 16B, 17B-C,18B, 19C, 23A, 23C, 23F,24C


ECON: 17C

Chapter 17: Stabilizing the National Economy · High Tax Revenues From Rapidly Growing Economy...

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