Post on 28-Dec-2015
FISCAL POLICY
Inflation
RealGDP
AS1
AD1 AD2
Economy in recession, Unemployment = 9.1%
Expansionary Fiscal Policy needed
Lower Taxes & ↑ Gov’t spending
C ↑ & G ↑ => AD shifts right
End result: higher GDP, moreJobs & slightly higher inflation
Economists often Disagree• Are tax cuts good or bad?
• Do Large Deficits always raise interest rates?
• Will taxing “rich” people significantly lower GDP?
IT DEPENDS!
The answer to most economic questions is:
2013 U.S. Economy
Economy well below full potentialWhat Now?
Tax Cuts?Gov’t Spending?New Incentives?Self-Regulation?
AD1
Inflation
RealGDP
AS1
Protests In France & Greece Turn Violent
Europe & AusterityAusterity = Extreme Gov’t budget cuts & tax increases
Often AFTER crowding out!
CLASSICAL Economists
– Markets are naturally self regulating
– No government intervention necessary
– Recessions are temporary
– Great Depression challenged Classical View
Classical economists were the 1st school of economic thought starting in 1776Adam Smith was the founder and they believed:
John Keynes 1883-1946
• Founder of Keynsian Economics– Greatly influenced Fiscal Policy after the Great Depression
• Believed recessions could be permanent
• Argued investment by Government can moderate the “ups & downs” of business cycle
Theory – Period Challenged
Classical Theory - Great Depression (1929)
Keynesian Economics- Stagflation (late 1970’s)
Neo-Classical Theory Great Recession (2008)
Keynes-Stimulus Debates
• Economists argue over the benefits/costs of both expansionary Fiscal Policy
Benefits Costs/Risks Inflation
RealGDP
AS1AS1
AD1
Austrian Economics
• Friedrich Hayek (1899 – 1992)– Austrian School of Economics
• Against active Fed Policy• Promoted “self regulation” of free market
• Believed low interest rates led to Malinvestment
Jobless Recovery
• http://marketplace.publicradio.org/display/web/2010/06/18/mm-a-jobless-recovery-and-a-lost-generation/
Supply-Side Policy
• Basic Belief: Government Incentives Matter
• Goal: use incentives to encourage new business!– shift the aggregate supply curve right
– when PPF shifts right => AS shifts right
• The supply-side toolbox consists of:– Tax cuts to stimulate work, saving, and investment (I↑)
– Deregulation to reduce production cost/stimulate investment.
– Expenditures on education training/research expands capacity to produce
PriceLevel
Real GDP
AS
AD
Cars
TechnologyGoods
. B
100
100
----------
----
----
---50
50
United States
GDP GDP GDP
What creates Economic Growth?
INCENTIVES MATTER!!!
Classical, Keyensian and Supply Side Economists approach the same economic problems in different ways!
AD1
Inflation
RealGDP
AS1
Growing GDP in the Long Run
Qty
Food
Qty
Shelter
. B
. A
. C
(100, 0)
(0,100)
(50,50)
(100, 0)
(0,100)
(50,50)
U.S.PPF Graph