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3 (1) - 18 PART 1 WHAT IS ECONOMICS The lesson economists...

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Unformatted text preview: 18 PART 1 WHAT IS ECONOMICS? The lesson economists learned from the troubles of the 1930s is that overall spending—the amount of goods and services that consumers and businesses want to buy—sometimes doesn't match the amount of goods and services the economy is capable of producing. In the 1930s. spending fell far short of what was needed to keep American workers employed. and the result was a severe economic slump. In fact. shortfalls in spending are responsible for most. though not all. recessions— although nothing like the Great Depression has happened since the 19305. It's also possible for overall spending to be too high. In that case, the economy experiences inflation, a rise in prices throughout the economy. This rise in prices occurs because when the amount that people want to buy outstrips the supply. producers can raise their prices and still find willing customers. Government Policies Can Change Spending Overall spending sometimes gets out of line with the economy’s productive capacity. But can anything be done about that? Yes. a lot. Government policies can have strong effects on spending. For one thing. the government itself does a lot of spending on everything from military equipment to education—and it can choose to do more or less. The govern- ment can also vary how much it collects from the public in taxes, which in turn affects how much income consumers and businesses have left to spend. And the gov- ernment’s control of the quantity of money in circulation. it turns out. gives it anoth- er powerful tool with which to affect total spending. Government spending, taxes, and control of money are the tools of macroeconomic policy. Modern governments deploy these tools of macroeconomic policy in an effort to manage overall spending in the economy. trying to steer it between the perils of reces- sion and inflation. These efforts aren't always successful—recessions still happen, and so do periods of inflation. But it’s widely believed that the growing sophistication of macroeconomic policy is an important reason why the United States and other major economies seem to be more stable today than they were in the past. >EC0N0MICSINACTION Adventures in Babysitting The website myarmylifetoo.com, which offers advice to army families. suggests that parents join a babysitting cooperative—an arrangement that is common in many walks of life. In a babysitting cooperative. a number of parents exchange babysitting services rather than hire someone to babysit. But how do these organizations make sure that everyone does their fair share of the work? As myarmylifetoo.com explains. "Instead of money. most co-ops exchange tickets or points. When you need a sitter, you call a friend on the list. and you pay them with tickets. You earn tickets by babysitting other children within the co-op." In other words, a babysitting co-op is a miniature economy in which people buy and sell babysitting services. And it happens to be a type of economy that can have macro- economic problems! A famous article titled "Monetary Theory and the Great Capitol Hill Babysitting Co-Op Crisis." published in 1977, described the troubles of a babysitting cooperative that issued too few tickets. Bear in mind that. on average. people in a babysitting co-op want to have a reserve of tickets stashed away in case they need to go out Several times before they can replenish their stash by doing some more babysitting. In this case, because there weren't that many tickets out there to begin with, most parents were anxious to add to their reserves by babysitting but reluctant to run them down by going out. But one parent’s decision to go out was another’s chance to baby- sit. so it became difficult to earn tickets. Knowing this, parents became even more reluctant to use their reserves except on special occasions. ...
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