ChapterChapter

EconomicEconomic

ChallengesChallenges17

Objective:

Students identify economic challenges that persist in free markets.

Inflation• Inflation is not occurring every time prices

go up. Inflation is an increase in the average level of price, not a change in a specific price.

Causes of Inflation

• Demand-Pull Inflation: shortages lead to price increases

• Hyperinflation: more than 500% inflation; often caused by over printing money (Germany in the 1920s)

• Cost-Push Inflation: Rising cost of goods/services sets off a chain reaction

Significant inflation is almost always associated with slower growth in real GDP.

The Costs of Inflation

• The amount of goods/services people can buy decreases. This hurts people with fixed incomes the most.

• Inflation makes it harder to judge the value of goods and services from one year to the next.

• Makes it difficult to plan spending. • Inflation hurts savers/hoarders but helps

borrowers. This still hurts lenders.

Government Strategies:

• The Federal Reserve is responsible for the nation’s monetary policy.

• Its helps control inflation by limiting the amount of money in circulation and by controlling the amount of interest banks pay for their loans.

Unemployment• unemployment rate: the percentage of

individuals in the civilian labor force who actively looked for a job that month but could not find one.

• In June 2005, the unemployment rate was about 5 percent—a relatively low number.

Misleading because: – The Bureau of Labor Statistics does not count people who are

too discouraged to continue to look for a job.– The government considers people employed even if the only

work they can find is a part-time job that pays very little.

Types of Unemployment

• Frictional unemployment: occurs whenever people leave their old jobs and before they have found new jobs. Rises in the spring. Can you guess why?

• Structural unemployment: a change in the economy that reduces the demand for a particular group of workers and their skills.

• Cyclical unemployment: there are not enough jobs to go around. Directly related to fluctuations in the business cycle

• Seasonal unemployment: caused by seasonal changes in the weather or in the demand for certain products.

The Limits of Full Employment

• Full employment does not mean zero unemployment. It means the lowest possible unemployment rate in a growing economy with all factors of production used as efficiently as possible.

When unemployment rate drops below 4.5% economists consider there to be full employment.

Government Policies:

• no easy solutions for unemployment• Automatic Stabilizers: automatically

provide benefits if the economy threatens the income of individual workers.– Unemployment Insurance: a federal

program that provides cash benefits for a specific period of time to workers who have lost their jobs through no fault of their own.

– Other examples: Welfare, Social Security, & Medicare.

Poverty• Poverty is usually defined as not having

enough income to buy the essentials—food, shelter, clothing, and other basic needs.

Measuring Poverty

• Poverty thresholds are dollar estimates of the amount of annual income needed to support families of various sizes.

• Poverty guidelines: a simplified version of poverty thresholds issued by the Department of Health and Human Services to determine who is eligible for various federal programs designed to help families in need.

Poverty & Ethnicity:

• In 2003, 24.4 percent of African Americans and 25.5 percent of Hispanics lived in poverty compared to 12.5 percent of the total population.

• Poverty rates were highest for families headed by single women, particularly if they were African- American or Hispanic.

• Economic principles cannot explain why there is more poverty among some groups than others.

• The answer lies in past patterns of social behavior—particularly in the history of discrimination.

Causes & Effects of Poverty

• unfavorable economic conditions,

• unstable home environments,

• illness or disability, • substance abuse,• discrimination,• and inadequate

education.

• Vicious Cycle: They are poor because they do not have the skills to be productive, but because they are poor, they don’t have the money to acquire the skills necessary to get a good job. To make matters worse, they also lack the money to provide their children with the kind of education that will help them find good-paying jobs in the future.

Government Anti-Poverty Programs

• Welfare programs: Local, state, and federal governments have created a number of programs to help the poor.

• Temporary Aid to Needy Families (TANF) is a monthly cash assistance program for poor families with children under the age of eighteen.

• The food stamp program allows needy individuals to exchange stamps for food products at authorized stores. In some places, the Electronic Benefits Transfer (EBT) has replaced actual food stamps with a debit card.

Government Anti-Poverty Programs

• The Child and Adult Care Food Program (CACFP), which provides federal grants of money and food to nonprofit elementary and secondary schools and child-care institutions so that they can serve milk, well-balanced meals, and snacks to children.

• The Special Supplemental Food Program for Women, Infants, and Children (WIC) provides food for pregnant and nursing women, as well as for infants and children under the age of five.

• Earned Income Tax Credit (EITC) is a reduction in the amount of income tax a worker owes.

Can You Answer?

1. How does inflation differ from other price increases?

2. What methods do governments use to reduce inflation? Unemployment? Poverty?

3. What are three reasons for inequality in income?