Presentation on theme: "Today’s Warm Up Turn to page 396 and read the section, “A New Role for Government” In your notes, define Keynesian Economics and be ready to share!"— Presentation transcript:
1 Today’s Warm UpTurn to page 396 and read the section, “A New Role for Government”In your notes, define Keynesian Economics and be ready to share!
2 Fiscal PolicyToday’s LEQ: How are monetary and fiscal policy used to achieve economic stability?
3 The Employment Act of 1946“The Congress hereby declares that it is the continuing policy of the Federal Government to use all practicable means… to promote maximum employment, production, and purchasing power.”Answer in your notes: How does the Employment Act of 1946 relate to Keynesian Economics?
4 Activity 1: U.S. Unemployment Rates & the Federal Budget, 1928-1946 Using the data on unemployment over this period and your general knowledge of history and economics, answer the discussion questions.Be ready to share!
6 What is Fiscal Policy?The use of government spending and revenue collection to influence the economySpecifically, to promote economic growth, full employment, and price stabilityEvery year, the gov’t decides how much to spend and how much to tax
7 Expansionary Fiscal Policy Used to encourage growth when the economy is in recession or to prevent a recessionFalls into either one or both categories: increase gov’t spending and cutting taxes
8 Expansionary Fiscal Policy Increase in Gov’t SpendingIncreases aggregate demand & causes prices to riseHigher prices encourage suppliers of g/s to produce moreFirms hire more workers leading to lower unemployment and increase in output – the economy EXPANDS!Cutting TaxesIndividuals have more money to spend and businesses keep more of their profits.Consumers spend more on g/s and firms have more money to spend on land, labor, and capital.These actions will increase demand, prices, and output – the economy EXPANDS!Expansionary Fiscal Policy
9 Contractionary Fiscal Policy Used to decrease growthFor example, when fast-growing demand exceeds supply, producers must choose – raise prices or raise outputOften leads to high inflation discouraging economic growth and stabilityFalls into one or both of two categories: decrease gov’t spending and raising taxes
10 Contractionary Fiscal Policy Decreasing Gov’t SpendingDecreases aggregate demand b/c the gov’t is buying less than before.Lower prices encourage suppliers to cut their production and possibly let workers go.Lower production lowers the growth rate - the economy CONTRACTS!Increasing TaxesIndividuals have less money to spend and businesses keep less of their profits.Consumers spend less on g/s and firms have less money to spend on land, labor, and capital.These actions will decrease demand, prices, and output – the economy CONTRACTS!Contractionary Fiscal Policy
11 Activity 2: Expansionary or Contractionary Fiscal Policies Activity 2: Expansionary or Contractionary Fiscal Policies? That is the Question!In the situations provided, decide whether the appropriate fiscal policy response is expansionary (E), contractionary (C), or no change (NC). Write E, C, or NC next to each statement to indicate the policy you believe is most appropriate.
12 Limits to Fiscal Policy Political Pressures: Candidates may not always have the courage to do the right thing when its unpopular with voters
13 Go back to Activity 2…Based on the situations provided, could candidates win a national election by supporting Keynesian discretionary policies?Go through each situation and decide yay or nay and why
14 Limits to Fiscal Policy Time Lags: Congress and the President also have to know when to implement fiscal policies – Fiscal policy takes time!Recognition LagAdministrative LagOperational LagThink of a red light…Create your own analogy…
15 Limits to Fiscal Policy Predicting the Future: It’s difficult to know current state of the economy. Business cycle is unpredictable & politicians may put off making changes in fiscal policy until more info is available. By then it’s often too late Think of the idiot in the shower…Create your own analogy…
16 Complete After Your Quiz: Limits to Fiscal Policy Use pages 391 – 393 to fill out the rest of the “limits to fiscal policy” chart on the back of your guided notes.Be ready to share!
17 Automatic Stabilizers Not all fiscal policies are discretionary – some are set up to stabilize the economy automaticallyDiscretionary fiscal policies involve a deliberate decision by the Prez/Congress to manipulate taxes/spending to stabilize the economyMost taxes and transfer payments (i.e. social security, welfare, unemployment compensation) are tied to GDP and personal income, so they change automatically
18 Examples of Automatic Stabilizers Higher unemployment (contractionary phase) higher spending for unemployment compensation & revenues from income taxes automatically fall (automatic expansionary stabilizer)Higher inflation (expansionary phase) wages and price levels rise & gov’t receives more income and sales taxes (automatic contractionary stabilizer)
19 The US experienced strong economic swings before WWII The US experienced strong economic swings before WWII. Why did this change?
20 Automatic Stabilizers After WWII, federal taxes and transfer payments sharply increasedBoth helped stabilize economic growth
21 Activity 3: Automatic Stabilizers Identify which of the policies listed there are automatic fiscal stabilization policies
22 Activity 4: Memorandum from the President of the United States Take on the role of the Council of Economic Advisors (CEA) and prepare a report for President Wynn on appropriate fiscal policy actions, based on the economic data provided in the handout.Be ready to read your report to the class!