GRAPHING FISCAL POLICY

Warm Up:Warm Up: What is causing the nation to be in a What is causing the nation to be in a

recession?recession? What could cause the nation to experience What could cause the nation to experience

a period of inflationa period of inflation??

To Fight Recession…To Fight Recession…

Need to pursue ________ fiscal policy!!!Need to pursue ________ fiscal policy!!! This mean, taxes ____ and government This mean, taxes ____ and government

spending ____spending ____

So, is the government running a budget So, is the government running a budget surplus or a budget deficit??? Explain.surplus or a budget deficit??? Explain.

Expansionary Fiscal PolicyExpansionary Fiscal Policy

Running a budget deficit…Running a budget deficit… Spending more money than they are Spending more money than they are

collecting in taxescollecting in taxes Therefore, needs to get the extra money Therefore, needs to get the extra money

by taking out more loans!!!by taking out more loans!!!

Illustrating the Solution:Illustrating the Solution:Recessionary Gap GraphRecessionary Gap Graph

AS

AD

PL

O/E

Y*Y

ASLR

I

Too _______ Too _______ spending is spending is causing Y ____ causing Y ____ Y*Y*

Fixing the Problem: Fixing the Problem: ________________ FISCAL ________________ FISCAL

POLICY!!!POLICY!!!

T___ DI___ C & I __ AE__ AD___ PL & O/E___T___ DI___ C & I __ AE__ AD___ PL & O/E___ G___ AE__ AD___ PL & O/E___G___ AE__ AD___ PL & O/E___ Transfer Payments DI__ C & I__ AE__ AD___ PL/OETransfer Payments DI__ C & I__ AE__ AD___ PL/OE

Fixing the Problem:Fixing the Problem:ELIMINATE THE RECESSIONARY GAPELIMINATE THE RECESSIONARY GAP

USING EXPANSIONARY FISCAL POLCIY!USING EXPANSIONARY FISCAL POLCIY!

C___C___ I____ AD____ PL & O/E___ I____ AD____ PL & O/E___ G___G___

Fixing the Problem:Fixing the Problem:Eliminate the Recessionary Gap UsingEliminate the Recessionary Gap Using

Expansionary Fiscal PolicyExpansionary Fiscal PolicyAS

AD

PL

O/E

O/E1

O/E2

PL1

PL2

AD2

To Fight Inflation…To Fight Inflation…

Needs to pursue _________ fiscal policyNeeds to pursue _________ fiscal policy This mean, taxes____ and government This mean, taxes____ and government

spending ______spending ______

The government will be running a budget The government will be running a budget ______.______.

Contractionary Fiscal PolicyContractionary Fiscal Policy

Since they are collecting more tax Since they are collecting more tax revenue while government spending revenue while government spending is decreasing, they will have left over is decreasing, they will have left over money.money.

Illustrating the Problem:Illustrating the Problem:Inflationary Gap GraphInflationary Gap Graph

AS

AD

PL

O/E

Y* Y

ASLR

I

Too ______ Too ______ spending is spending is causing causing Y ____ Y*Y ____ Y*

How to Fix the Problem:How to Fix the Problem: ________________ FISCAL ________________ FISCAL

POLICY!!!POLICY!!!

T___ DI___ C & I __ AE__ AD___ Pl & O/E___T___ DI___ C & I __ AE__ AD___ Pl & O/E___ G___ AE__ AD___ PL & O/E___G___ AE__ AD___ PL & O/E___ Transfer Payments DI__ C & I__ AE__ AD___ PL/OETransfer Payments DI__ C & I__ AE__ AD___ PL/OE

Fixing the Problem:Fixing the Problem:ELIMINATE THE INFLATIONARY GAPELIMINATE THE INFLATIONARY GAPUSING CONTRACTIONARY FISCAL USING CONTRACTIONARY FISCAL

POLCIY!POLCIY!

C___C___ I____ AD____ PL & O/E___ I____ AD____ PL & O/E___ G___G___

Fixing the Problem:Fixing the Problem:Eliminate the Inflationary Gap Eliminate the Inflationary Gap

UsingUsing Contractionary Fiscal PolicyContractionary Fiscal PolicyAS

AD

PL

O/E

O/E2

O/E1

PL1

PL2

AD2

POLICY INSTRUMENTS POLICY INSTRUMENTS

Systems set in place by the Systems set in place by the government to help achieve government to help achieve

macro goalsmacro goals

POLICY INSTRUMENTSPOLICY INSTRUMENTS1.)1.) Fiscal PolicyFiscal Policy - govt using tax or spending to - govt using tax or spending to

stabilize stabilize

the economythe economy

2.) Monetary Policy 2.) Monetary Policy - our national bank, the FEDERAL - our national bank, the FEDERAL

RESERVE, controls the Money Supply to stabilize the RESERVE, controls the Money Supply to stabilize the

economyeconomy

3.) Foreign Economic Policies 3.) Foreign Economic Policies - trade policies that - trade policies that

attempt to keep imports in line with exports attempt to keep imports in line with exports

4.) Income Policies 4.) Income Policies - govt actions to moderate inflation - govt actions to moderate inflation

by direct steps (ex: legislated wage and price by direct steps (ex: legislated wage and price controls)controls)

External VariablesExternal Variables

Things we have no control over…but Things we have no control over…but they still affect the overall outcome they still affect the overall outcome

of our economyof our economy

1.1. WeatherWeather

2.2. Foreign outputForeign output

3.3. Revolutions or WarsRevolutions or Wars

VideoVideo

““Unintended Consequences -- The Great Unintended Consequences -- The Great Depression”Depression”

Take Notes!Take Notes!

Wrap-UpWrap-Up

1)1) What are some of the similarities What are some of the similarities between the problems leading up to the between the problems leading up to the Great Depression and today?Great Depression and today?

2)2) What could have been done to avoid the What could have been done to avoid the Great Depression from being “Great?”Great Depression from being “Great?”

3)3) What is the multiplier effect?What is the multiplier effect?4)4) What is “The Fed” (Federal Reserve) and What is “The Fed” (Federal Reserve) and

what is it responsible for?what is it responsible for?5)5) How does cash get it’s value?How does cash get it’s value?

Wrap Up: Fill In The Correct Wrap Up: Fill In The Correct AnswerAnswer

1.1. To correct an inflationary problem in the To correct an inflationary problem in the U.S., the AD curve needs to shift to the U.S., the AD curve needs to shift to the __________.__________.

2.2. Using an expansionary fiscal policy results in Using an expansionary fiscal policy results in taxes taxes __________________..

3.3. Supporters of fiscal policy believe that Supporters of fiscal policy believe that inflation can be reduced by inflation can be reduced by ____________________

________________________________..4. Keynes believed that spending money was 4. Keynes believed that spending money was

the key to controlling the economy during a the key to controlling the economy during a __________________________..

5. Full employment implies that 5. Full employment implies that unemployment is unemployment is ________________________________..