6.7: Other Macroeconomic Issues
6.7.1: Short-Run Supply Side Options
Read this article, which covers several aspects of achieving short-run equilibrium. Focus your attention on how the approaches covered in this reading relate to shifts in the supply curve from the perspectives of macroeconomics and microeconomics. Essential to these approaches are changes in tax rates and regulatory burden.
6.7.2: The Phillips Curve
Read these sections about the Phillips curve, a short-run trade off between inflation and unemployment. The Phillips curve demonstrates that there is a trade-off between inflation and unemployment. According to the curve, when inflation is higher than expected, people will work at a lower real wage. Employers will in turn hire more workers at the lower real wage, increasing output and reducing unemployment. In the 1970s and 1980s, when both inflation and unemployment were continually rising - a phenomenon known as stagflation - many economists questioned the soundness of the Phillips curve. Attempt the "Try It” exercises at the end of each section.
Read these sections about the Phillips curve, a short-run trade off between inflation and unemployment. The Phillips curve demonstrates that there is a trade-off between inflation and unemployment. According to the curve, when inflation is higher than expected, people will work at a lower real wage. Employers will in turn hire more workers at the lower real wage, increasing output and reducing unemployment. In the 1970s and 1980s, when both inflation and unemployment were continually rising - a phenomenon known as stagflation - many economists questioned the soundness of the Phillips curve. Attempt the "Try It” exercises at the end of each section.
Watch this lecture about the Phillips curve.
6.7.3: The Misery Index
Read this article, which covers several aspects of the misery index, including its calculations and some historical data.
6.7.4: The Laffer Curve
Read this article about how tax revenues relate to tax rates.
6.7.5: Policy Complexities
Read this article about one of the unconventional policies the government can adopt to stabilize the financial system in the economy.
6.7.5.1: Goal Conflicts
Read this article for additional perspective about macroeconomic goals and the inherent conflict among them as they relate to a global environmental context.
6.7.5.2: Measurement, Design, and Implementation Problems
Read each of the four webpages linked from this section: "Arguments For and Against Discretionary Monetary Policy,” "Arguments For and Against Fighting Recession with Expansionary Monetary Policy,” "Arguments For and Against Fighting Recession with Expansionary Fiscal Policy," and "Arguments For and Against Inflation Targeting Policy Interventions.” You will gain additional insights about policy formation, implementation, and evaluation. In each case, consider whether the right questions were asked and whether the proper measures received focus. Which side of each of these debates would you find yourself?
6.7.5.3: Economic Growth, Saving, and Investment
To use this simulation, you must download and install the Mathematica Viewer from the Wolfram Demonstrations Project. Although this software is free, it is a sizable download. This activity is therefore optional.
Robert Solow won the Nobel Prize in Economics in 1987 for his work in providing a framework and theory with which to think about all aspects of economic growth.
This simulation provides a simplified way to think about economic growth and how savings, depreciation, and population growth -- or more precisely, the resulting growth in the labor force -- all affect growth.
It is important to recall that in the Keynesian model, Saving = Investment = Business Spending. Depreciation is the using up of Investment. This model shows investment growing by the rate of saving and shrinking by the rate of depreciation. In our economy, consumers save about 5% of their income, while businesses tend to "save" (read: invest) more. Some societies save up to 15% of their income!
Once you have downloaded the software to your desktop, open the simulation and read the introduction. Experiment with each slider, examining what happens when depreciation increases or decreases or population increases or decreases. Look at the rate of saving slider, too, and note that .05 is 5%.
The model shows the relationship of capital/worker and economic growth. Remember this is a very general conceptual model and only shows general trends and possible issues that a growing economy could encounter.
As you examine various scenarios and their overall consequences, think of where the US may fit within the conceptual framework. Are we re-investing too little? Are we replacing capital as it depreciates or just consuming that capital with little thought of replacement?
Back up with your claims with evidence from the simulation and background from the other course resources. Consider posting your conclusions in the course Discourse discussion board, and be prepared to defend your position!