Economics Principles & Practices

Chapter 16: Achieving Economic Stability

Chapter Overviews

Chapter 16 deals with the costs of economic instability and the major stabilization policies used to remedy it.

Section 1 discusses the economic and social costs of low growth, inflation, and unemployment. The economic costs can be measured in terms of stagflation, the GDP gap, or the misery index. The social costs include the frustrations of being unemployed, wasted resources, potential political instability, increased crime, and/or damage to family values.

Section 2 analyzes macroeconomic equilibrium with the help of aggregate supply and aggregate demand curves. The aggregate supply curve represents the sum of all production at all possible price levels. The aggregate demand curve represents the total demand that would take place at all possible price levels. Most of the factors that influence the individual supply and demand curves also affect the aggregate curves—they shift to the right to represent an increase, and to the left to represent a decrease.

Section 3 discusses several stabilization policies. Demand-side policies evolved from Keynesian economics and are designed to affect the aggregate demand curve. Supply-side economics are those economic policies designed to affect the aggregate supply curve. Monetary policies include actions by the Federal Reserve System (Fed) that change the cost and the availability of credit.

Section 4 examines the relationship between economics and politics—including the demise of discretionary fiscal policy, the growing importance of automatic stabilizers, and the importance of the Fed's independent status. Economists come from a variety of backgrounds and have a diversity of interests. Even so, they are more in agreement on key issues than most people realize. In addition, they have made considerable headway in raising awareness of how the economy operates. Finally, the president's Council of Economic Advisers provides advice on economic matters and advocates the president's economic programs.