Unemployment and Inflation
Two of the biggest issues in macroeconomics are inflation and unemployment. Policymakers would like to keep both measures low. Often, however, there is a trade-off between the two. A strong economy that lowers unemployment can put upward pressure on prices. A weak economy that lowers inflation can increase unemployment.
Before the COVID-19 pandemic, we had both very low unemployment and inflation. Then unemployment rose. In the future, unemployment and inflation could change and it’s good to have policy plans in place before either of these problems gets too bad.
Imagine that you oversee macroeconomic policy. Answer these questions, being sure to explain your answers.
- What are some of the problems, difficulties, or hardships caused by unemployment?
- What are some of the problems, difficulties, or hardships caused by inflation?
- If you had to make a choice today between a policy that would head off increases in inflation or increases in unemployment, which one would you choose?
Exploring Tax Cuts, Jobs, and Tax Revenue
There has been discussion about whether the Tax Cuts and Jobs Act that took effect in 2018 is increasing tax revenue. Tax revenue can be thought of an as average tax rate multiplied by taxable income. If the average tax rate falls while taxable income stays the same, tax revenue will fall. But what if the tax cuts increase taxable income? The major schools of thought in macroeconomics (Keynesians and Neoclassicals) believe that tax cuts increase economic growth. Economic growth increases taxable income. Our economic growth before the pandemic brought unemployment down to historically low levels.
Reply to these questions to begin your discussion:
- Do you think that tax cuts increase economic growth and taxable income so much that tax revenue increases?
- Or do you think that tax cuts reduce tax revenue? Explain your answers.
Exploring the Role of the Federal Reserve Bank
The Federal Reserve Bank (the “Fed”) is the central bank of the United States. One of its jobs is to manage the money supply. Sometimes it increases the money supply. Sometimes it decreases the money supply.
Reply to these questions in your post:
- Name at least one action that the Fed could take to reduce the money supply and raise interest rates.
- Given our current economy, would you recommend that the Fed reduce the money supply and raise interest rates, or expand the money supply and lower interest rates? Please explain.
Trade and Tariffs
- When the United States puts tariffs on imports, who do you think ultimately pays these tariffs? Is it the foreign companies selling here, American consumers, or both? Explain your answer.
- Is it good or bad for American consumers when the United States puts tariffs on imports?