Info

Note: Real GDP growth (chained 1996 dollars) and inflation (measured by the CPI-U-RS) are average annual rates from the end of the preceding year through the end of the period. Unemployment rates are monthly averages. Data for 2000 are through the third quarter for real GDP and through November for unemployment and inflation.

Sources: Department of Commerce (Bureau of Economic Analysis) and Department of Labor (Bureau of Labor Statistics).

experience unemployment. Although carefully chosen stabilization policies cannot eliminate recessions, they have the potential to reduce the frequency and severity of economic downturns. As seen in Figure 16.4, the benign economic environment of the late 1990s featured faster and more equally distributed income growth than was experienced during the previous 20 years.

To understand the limitations of policy, factors that contribute to recessions must be taken into account. A sharp reduction in national defense expenditures, for example, gives rise to structural adjustments in production and employment. Such reductions followed World War II, the Korean, and Vietnam wars and are now taking place in response to the end of the Cold War. Although society as a whole is obviously better off when conflict ends and the resources devoted to national defense can be put to better use, large decreases in military spending disrupt employment as production patterns adjust to meet changing demands. External shocks in the form of large and sudden oil price increases have also been an important factor in several recent recessions. The partial embargo on oil exports by the Organization of Petroleum Exporting Countries in 1973 tripled world oil prices. Because oil is an important input in production, oil price shocks forced many industries to change production methods. Moreover, because the United States is a net oil importer, oil price shocks transfer income and wealth to oil exporting countries and thereby reduce the overall demand for domestic output. It is important to recognize that even if no policy mistakes are made, structural adjustments and external shocks may cause occasional periods of declining output. It is unrealistic to expect that well-chosen public policies can compensate completely for all types of economic disturbances.

Was this article helpful?

0 0
Your Retirement Planning Guide

Your Retirement Planning Guide

Don't Blame Us If You End Up Enjoying Your Retired Life Like None Of Your Other Retired Friends. Already Freaked-Out About Your Retirement? Not Having Any Idea As To How You Should Be Planning For It? Started To Doubt If Your Later Years Would Really Be As Golden As They Promised? Fret Not Right Guidance Is Just Around The Corner.

Get My Free Ebook


Post a comment