Reading Guide 6

Textbook Reading Guide – Unit 6 Business Cycle

Jim’s comments:  Back in an earlier Unit we skipped section 6.3 in Chapter 6. It’s time to go back and read that section closely.  Then, go back and do at least a skimming re-read of chapters 8 and 9 dealing with unemployment and inflation. Yes, you read those earlier but in this Unit we focus on the business cycle and the very beginning of policy to stabilize the business cycle (avoid recessions).  Stabilizing the business cycle is largely a question of balancing objectives between full employment and inflation because there’s a bit of a trade-off between them.  Policies to make the economy grow very fast and therefore reduce unemployment are very do-able. But if those growth policies are pushed too far, then the demand for goods and services exceeds the physical and human resources of the economy available at that time. This results in prices being bid up – in aggregate we want more than we can produce and so we start bidding up prices to try to obtain resources. In other words, inflation rises and creates a problem.  And the reverse is true. It’s not that hard to stop inflation. Just reduce demand. All that’s necessary is to take money out of the economy so that people and firms can’t buy things – but that reduces production and risks making unemployment worse.  Thus, you might gain some new insight by re-reading those two chapters with the lens of business cycle policy.

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Table of Contents from Principles of Macroeconomics, 2e