Economists generally argue that government action is desirable only if thereis market failure and if there is some assurance that government action will correct this failure. Market failure occurs when the private sector fails to achieve its economicgoals. B. Smoothly Rising Real Output 1. Economic growth implies continuous annual increases in this output. Increases in GDP can occur because of either an increase in the price level or an increase in output.
Economic growth occurs when output, or real GDP, grows.
Real GDP is GDP adjusted for inflation. Normally, an increase in real GDP is accompanied by both an increase in productivity and an increase in employment. If real GDP is rising smoothly, the economy is likely to come close to achieving economic growth, full employment, and low inflation. Monetary policy involves changes in the nation's money supply and interest rates by the Federal Reserve. Economists differ in their views of the effectiveness of monetary and fiscal policy.