Chapter 17: Stabilizing the National Economy

The federal government uses monetary and fiscal policies, or stabilization policies, to keep the economy healthy. Chapter 17 focuses on the methods and theories used by the government to avoid the two problems that destabilize the economy—unemployment and inflation.

Unemployment and Inflation
Section 1 explains the measures of unemployment, defines the types of unemployment, and describes two problems that economists face in developing unemployment statistics. The section also explains the demand-pull and cost-push theories about the causes of inflation, introduces the concept of stagflation, and explains why stagflation is harmful to the economy.

Fiscal Policy
Section 2 describes a simple model of how income flows between businesses and consumers. The section also explains how Keynesian economists believe fiscal policy might reduce inflation.

Monetarism
Section 3 explains the theory of monetarism and the monetarists' views of the Fed's role in the economy. The section also describes how monetarist theory influenced government policy in the 1980s and analyzes the monetarists' major criticisms of fiscal policy.