1. Economic Policy
Public Policy

2. How does the government promote economic growth?
Public Policy
intro
How does the government promote economic growth?

3. Economic Performance
Public Policy

4. Policy Performance Gross Domestic Product
One of the main ways we measure economic performance of the economy
It measures the total value of all goods and services produced in a country
Measures consumption, investment, government expenditures and net exports
A government will usually do what it can to encourage GDP growth

5. Policy Performance Business Cycle
The business cycle measures GDP growth
Slope of line increasing = GDP growth
Decreasing = GDP is shrinking
The govt may intervene to try to prevent “Contraction”
The govt may even step in to slow expansion
The best case for the govt is slow, steady growth. Peaks & troughs can cause problems for the economy

6. Policy Performance Job Creation
Politicians & pundits refer to the president’s ability to “create jobs” in the US during his time in office
It measures the change in total employment every quarter
It’s definitely not the most useful measures of the president’s performance – jobs are not often the result of presidential action
It can be good PR for the president and it’s an easy message for the people
It’s almost always GOOD news

7. Policy
Performance
Job Creation

8. Economic Problems
Public Policy

9. It is typically caused by a widespread drop in spending
Policy
Problems
Recession
A recession is a period of economic decline where GDP has fallen for two consecutive quarters
It is typically caused by a widespread drop in spending
A recession that is severe – where GDP falls by 10% or GDP decline lasts 3 or 4 years is called a depression
The “Great Recession” of 2008 lasted from the 3rd quarter of 2008 until the 2nd quarter of 2009

10. Policy Problems Unemployment
Unemployment rate refers to the percent of people who are looking for work but cannot find jobs.
Unemployed is defined by the govt as: people who do not have a job, have actively looked for work in the last 4 weeks, and can work now
People who are not looking for work are not unemployed.
People who are “underemployed” are not unemployed.

11. Policy Problems Inflation
Inflation is the rise in prices of goods and services.
This is measured by the Consumer Price Index – which measures the prices of a “market basket” of goods everyone buys
Inflation hits people on fixed incomes the hardest. Their wages don’t rise as fast
People with a large amount of savings are hurt by inflation
People with a large amount of debt can be helped by inflation

12. Policy Problems Party Responses
Democrats are more likely to focus on preventing high rates of unemployment
Unemployment is more likely to impact their coalition of voters
Republicans are more likely to focus on preventing high rates of inflation
Inflation is more likely to impact their coalition of voters

13. Fiscal Policy
Public Policy

14. Policy Fiscal Policy Fiscal Policy
Fiscal policies are the taxing and spending policies of the United States
These are controlled by the president and Congress
These are the decisions that make
up the federal budget
Expansionary policy or stimulus will encourage economic growth
Contractionary policy will attempt to slow economic growth

15. Policy Fiscal Policy Expansionary Fiscal Policy
If the economy is shrinking, the government can act to stimulate it
The government has ways to influence aggregate demand (total demand)
Cutting taxes sparks an increase in aggregate demand because people have more money to spend
Increasing spending sparks an increase in aggregate demand because it will result in more government jobs

16. Policy Fiscal Policy Tax Cuts
Tax cuts mean that people have more money to spend.
People will use their increased income at businesses in the economy
Businesses will be busier and may need to hire more workers to meet demand
By cutting taxes, the government has reduced unemployment!

17. Policy Fiscal Policy Increased spending
The govt will spend more money – on projects, increased benefits, etc.
Projects require workers – so there are increased jobs already
Workers will also be spending increased income, creating more demand in the economy – businesses get busier
By increasing spending, the government has reduced unemployment!

18. Policy Fiscal Policy Contractionary Fiscal Policy
If the economy is growing too fast, the government can act to slow the growth
The government has ways to influence aggregate demand (total demand)
Raising taxes sparks a decrease in aggregate demand because people have less money to spend
Cutting spending sparks a decrease in aggregate demand because it will result in fewer government jobs

19. Policy Fiscal Policy Raising Taxes
Tax increases mean that people have less money to spend.
People’s checks are smaller, so they buy less to adjust to reduced incomes
Businesses will have surplus goods and services – surpluses cause price drops
By raising taxes, the government has reduced inflation!

20. Policy Fiscal Policy Decreased spending
The govt will spend less money – fewer projects, benefit cuts, etc.
Government workers are laid off. Businesses with contracts are less busy
Workers will also be spending less, creating less demand in the economy – businesses reduce prices
By decreasing spending, the government has reduced inflation!

21. Policy Fiscal Policy Keynesian Economics
The govt needs to use its tools of tax cuts or stimulus spending to deal with the highs and lows of the business cycle.
When the economy is performing poorly, the govt must stimulate it.
When the economy is bad – cut taxes and spend more, run a deficit
When the economy is performing well, the govt must slow it.
When the economy is good – raise taxes and cut spending, try to reach a surplus

22. Policy Fiscal Policy Govt. reacts to business cycle
Inflation may occur
Inflation is occurring
Govt. must decrease activity.
Govt. must decrease activity.
Unemployment is occurring
Govt. must increase activity.

23. Monetary Policy
Public Policy

24. Policy Monetary Policy Federal Reserve The central banking system of
the United States
It regulates commercial banking in the US
Any person can open accounts with a commercial bank
Commercial banks have accounts with the Federal Reserve
The Federal Reserve splits the country into 12 zones to regulate banks in those regions

25. They make and enforce rules that normal banks have to follow
Policy
Monetary Policy
Roles of
Federal Reserve
The Fed controls monetary policy in the US – how much money is circulating.
They supply the economy with paper money – decide when it needs to be put into ciruculation
They make and enforce rules that normal banks have to follow
They set the discount rate – which impacts the interest rates for all money lending by US banks
They do “check clearing” services – move money from one bank to another when people use checks

26. Policy Monetary Policy Board of Governors of the Federal Reserve
The Board of Governors makes the decisions for the Federal Reserve
It’s made of 7 members – appointed by the president & approved by Congress
They serve for 14 year terms
They are chosen because they are economic experts – not politicians
They are appointed by politicians, so each party picks experts with philosophies that they support

27. Policy Monetary Policy Chairman of the Fed
The head of the Board of Governors of the Federal Reserve
Picked by the president and approved by the Senate
They serve for 4 year terms (while they are serving their 14 year term on the Board of Governors)
They make the final decisions about monetary policy based on the recommendations of the Board
Janet Yellin was replaced by Jerome Powell in February 2018

28. Policy Monetary Policy Tools of the Fed
The Fed can change the “discount rate”
This is the interest rate the Fed charges a bank to take out a loan – it affects the interest rate that banks offer you
The Fed can change the “reserve requirement”
This is the minimum amount that a bank has to keep in its account in one of the Fed’s banks. This impacts how much they have left to loan you
They can conduct “open market transactions” – buy and sell US Treasury Bonds when it’s necessary

29. Policy Monetary Policy The Fed Discount rate ↑ Money Supply ↓
Reserve Requirement↑
Money Supply ↓
Reserve Requirement ↓
Money Supply ↑
Sells bonds
Money Supply ↓
Buys bonds
Money Supply ↑

30. Policy Monetary Policy Expansionary Monetary Policy
The Fed lowers the interest rate to increase the money supply
Loans are very cheap and easy to get
People borrow more money & buy more
Aggregate demand increases – businesses are busier & hire more people
The Fed has taken action that has reduced unemployment & caused economic growth

31. Policy Monetary Policy Contractionary Monetary Policy
The Fed raises the interest rate to decrease the money supply
Loans are more expensive
People borrow less money & they save for purchases
Aggregate demand decreases – businesses are less buy & must cut prices
The Fed has taken action that has reduced inflation & slowed economic growth

32. Bigly Ideas
Policy Makers

33. Public Policy Wrap Up Economic Problems Fiscal Policy Responses
Keynesianism
Monetary Policy Responses
Focus on these things: