economics unit three -...
TRANSCRIPT
Economics Unit Four
Macroeconomics
Opener: Wednesday, February 3rd
We are living in exponential times!
Shift Happens 2009
Did You Know? (2012)
Did You Know 2028?
Learning Objectives
SSEMA1 The student
will illustrate the
means by which
economic activity is
measured
SSEMA2 The student
will explain the role
and functions of the
Federal Reserve
System.
SSEMA3 The student
will explain how the
government uses
fiscal policy to
promote price
stability, full
employment, and
economic growth
Key Terms Macroeconomics Aggregate Demand Aggregate Supply Arbitration
Boycott Business Cycle Central Bank Consumer Price Index Current Dollars Cyclical
Unemployment
Deflation Depression Discretionary Spending Distribution of Income FDIC Federal Budget
Federal Reserve System FICA Fiscal Policy Frictional
Unemployment Glass Ceiling Government Deficit
Great Depression Grievance Procedure Gross Domestic Product Gross National Product
Inflation Injunction Internal Revenue
Service (IRS)
Labor Force Unskilled Labor Semiskilled Labor Skilled Labor Professional Labor
Labor Union Craft Union
Trade Union Industrial Union Company Union Independent
Union Mandatory Spending
Mediation Monetary Policy Monetary Standard Money National Debt Net National Income Peak
Per Capita Personal Income Pickett
Private Sector
Progressive Tax
Proportional Tax
Public Sector
Real or Constant Dollars
Recession
Regressive Tax
Reserve Requirement
Stagflation
Standard Of Living
Strike
Structural
Unemployment
Taxation
Sin Tax
Tax loophole
Individual Income
Tax
Sales tax
Trough
Unemployment
Wage Rate
Today’s Learning Standard
Measuring Economic Activity
The student will illustrate the means by which economic activity is measured
Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports
Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand.
Explain how economic growth, inflation, and unemployment are calculated.
Identify structural, cyclical, and frictional unemployment
Define the stages of the business cycle, as well as recession and depression.
Macroeconomics
Just like the field of microeconomics teaches us
specific things within the market economy,
macroeconomics gives us a overall view of
economic activity
Macroeconomics is the study of the whole
economy together – the aggregated spending,
saving, and investing decisions of all consumers
and businesses
These factors together – households, businesses,
government, and net exports – describe the health
of the economy as a whole!
Key Economic Indicators
The health of the economy and the “big picture” of
economics is measured in several ways
These include:
Gross Domestic Product (GDP)
The Consumer Price Index (CPI)
This is a measure of the rate of inflation
Unemployment
Gross Domestic Product (GDP)
To compare our system with other countries’
systems, and to compare the strength of our
own economy year to year, economists use
something called the
Gross Domestic Product (or GDP), which is the total
dollar value of all final goods and services
produced within a country during one calendar
year.”
Gross Domestic Product (GDP)
GDP is measured by assessing the total expenditures
(spending) of four different economic sectors:
1. Consumers (C) – Consumer Spending
2. Government (G) – Government Spending
3. Investment (I) – Investments from Industry
4. Net Exports (NX) – Exports Minus Imports
Gross Domestic Product
Famous Economic Formula
GDP= C+G +I+(X-M)
C= Personal consumption expenditures
(consumer spending).
Includes
durable goods: a lifetime of more than one
year, and
non-durable goods: a lifetime of less than
one year, and services.
G = Government Purchases
The dollar amount that federal, state, and
local governments spend on items
IE: highways, education, defense, etc.
I = Gross Capital Investment
Total value of all capital goods produced in a given nation during one year.
Fixed investment: Buildings, machinery, equipment
Inventory investment: raw materials, intermediate goods, final goods
The Net Exports (NM/NX) Sector The reason we subtract our imports from our exports is
this:
Exports - The money other countries spend on our
exports adds value to our economy
Imports - The money we spend on goods imported
from other countries takes money out of our
economy
So, the foreign sector’s
expenditure is
calculated only when
the transactions
add value to our
economy!
How Economists Calculate the GDP:
Which of these would be counted in the
GDP?
A. A tree cut by a woodcutter who sells it to a
lumber yard.
B. The lumber bought by the lumber yard who
then sells it to a furniture manufacturer.
C. A table made by the manufacturer now
sold to a couple in Detroit, Michigan.
The answer is C
They use only products produced in the current year. This would exclude things bought at yard sales.
Which of the following was used in the calculation of the GDP in 1999?
A. A car manufactured in 1998 but sold in 1999.
B. A used 1993 Toyota that was sold to Ms. Simpson in Memphis in 1999.
C. A Ford F150 produced in 1999 but sold in 2000.
How Economists Calculate the GDP:
The answer is C again!
How Economists Calculate the GDP:
They use only items produced within
national borders.
Would this include or exclude
Coca-Cola (a U.S. company)
produced at a plant in Russia?
Exclude
GDP: Is a measure of the strength of our
economy
Analyzing GDP – What Does it Mean?!?
If the nation’s GDP increases over time, you can tell that the economy is growing!
That’s a good thing!!
To get an accurate measurement, the calculation depends on two more factors:
Real GDP: the GDP of a nation adjusted for inflation
Nominal GDP: the GDP of a nation before accounting for inflation
So, a nation’s rate of growth is the percentage change
in its real GDP over time
So, How Do We Adjust for Inflation?
Inflation is the gradual increase in prices over time
This is just a fact of life - goods and services in the
future will never again cost what they did in 1920! -
so, deal with it!
However, when prices increase, we may be spending
more money without actually buying more goods
and services
So, to judge the growth of the economy (GDP),
we have to make sure that people are actually
buying more, not just spending more
Real vs. Nominal GDP
To adjust GDP for price increases economists
calculate both
NOMINAL GDP: the current GDP expressed in
current prices
REAL GDP: which is adjusted for price
increases-inflation
GDP Measures Economic Growth or Decline
Changes in Real GDP helps to determine if
the economy has increased or decreased its
actual production of new products
Limitations of GDP
Non-market activities: GDP does not include goods and services that people make or do themselves i.e. baby-sitting, mowing the lawn,
cooking dinner, washing cars
Underground economies: production and income not reported to the government i.e. black market products: illegal drugs,
weapons, stolen goods, exotic pets
Limitations of GDP
Negative Externalities: unintended economic side effects, or externalities that have monetary value not reflected in the GDP
Quality of Life: Some things that improve well-being cannot be included in GDP i.e. pleasant surroundings, ample leisure
time, personal safety
GDP does NOT include: value of used products
value of volunteer work
purely financial transactions
value of intermediary goods
Transfer of assets
GNP Gross National Product: annual income
earned by U.S. owned firms and U.S.
citizens
Market value of all goods produced by
Americans all over the world in one year
Checkpoint Questions Services such as
mowing the lawn or a
doctor’s visit, fall under
consumption
expenditures as a:
a. Durable good
b. Fixed investment
c. Non-durable good
d. Inventory
investment
At the end of the year, a
bike manufacturing firm
finds that its inventories
of bikes are $15,000
above the amounts of its
inventories last year.
Where would this be
counted in the GDP?
a. Consumption
b. Investment
c. Net exports
d. Government
purchases
Questions for Reflection What is the difference between intermediate goods
and final goods?
How does Gross Domestic Product (GDP) differ from
Gross National Product (GNP)
How does nominal GDP differ from real GDP?
Opener: Thursday, February 4th
Economics in the news! Macroeconomics is economics on a national and
global scale.
The information you get on news via TV, radio,
newspaper and Internet is primarily national and
global news…which often includes information on
economic health. So you’re being informed about
macroeconomics!
Take a page out of a Wall Street Journal and find an
article which sounds interesting to you.
Read the whole article like an economist! Underline
anything that might affect supply or demand on a
macro-basis.
Economics in the News After reading and underlining all you
economic information… On a clean sheet of paper
write your heading and your
writing prompt down.
Then answer your writing prompt in 4-6 complete
sentences.
Writing Prompt
Summarize your article and include details
which affect aggregate supply and demand.
Include details which give us a clearer
understanding of economic health of a
country, region or the world.
Focus #1 – Measuring Economic Activity The student will illustrate the means by which economic
activity is measured
Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports
Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand.
Explain how economic growth, inflation, and unemployment are calculated.
Identify structural, cyclical, and frictional unemployment
Define the stages of the business cycle, as well as recession and depression.
What did we learn yesterday? GDP is the total dollar value of all final goods and services
produced within a country during one calendar year.
Formula
GDP = C + G + I + NX
Two Kinds
Nominal and Real
Inflation Effect
GDP - Fed Reserve of St. Louis
Consumer Price Index The Consumer Price Index (CPI) is a measure of the
change in prices in an economy
Economists add up the total price of a “market
basket” of typical items bought by the average
family in a month
Then, they compare the total price of these goods
to the total price of the same items during a base
period (or previous year) by dividing the total by
the base
Then, they multiply the result by 100 to have an
index figure for comparison purposes
CPI = cost of today’s market basket
cost of a market basket in previous time X 100
Let’s Look at an Example…
Let’s say that in 2006, a year that we would
like to serve as our base year, the market
basket cost $960
Then, we measure the same goods again in
2007 and find that they cost $1000
So, it works out like this:
CPI = 1000
960
CPI = 1.04 X 100
CPI = 104
X 100 Remember, this number is an index figure. By itself, it doesn’t tell us much. We compare it to 100 (the base number integer that is always used) to figure out the percentage change!
Calculating Percentage Change
So, when we compare to our base integer of
100, we see that there has been a 4%
increase in prices:
We end up with 4/100, or 4%
If in this same year, GDP rose by only 4%, then we
know that there was no real growth – the change
was only due to inflation
However, if it grew by more than 4%, then the
economy did actually grow!
104 – 100
100
CPI Index
from
calculation
Base CPI integer that
is always used
Inflation and Growth
On the other hand, if prices increase but the
economy does not grow, a condition called
stagflation occurs. Stagflation is when there is
high inflation, the economic growth rate
slows and unemployment remains high.
Inflation and Growth
High inflation hurts wage earners because the
money they make is now worth less
Some businesses may offer cost-of-living
adjustments for their employees to balance
out the effects of inflation
Unemployment
To again monitor the health of our economy,
economists measure the Unemployment Rate.
Each month, they survey certain Americans to
find out their employment status.
The U.S. Government defines “employed” as
people 16 and older meeting one or more of
the following criteria.
Criteria to be considered “Employed”
1. Working for pay or profit for 1 or more hours
this week.
2. Working without pay in a family business 15
or more hours.
3. Having a job, but being ABSENT due to
illness, weather, vacation, etc.
The U.S. Government defines
“Unemployed" as:
1. NOT meeting any of the criteria above AND
2. ACTIVELY looking for work during the past 4 weeks.
The most closely watched and highly publicized labor force
statistic is
the UNEMPLOYMENT RATE=the percentage of people in
the civilian labor force who are UNEMPLOYED.
Unemployment
rate
unemployed
labor force x 100 =
Measuring Unemployment
Why is there Unemployment? In the end, unemployment depends on supply and
demand – the supply of able workers and the
demand by businesses for those employees
Some, but not all, unemployment is the result of a
downturn in the economy – a change in supply or
demand
Economists classify four different types of
unemployment
4 Types of Unemployment
Structural
Cyclical
Frictional
Seasonal
STRUCTURAL Unemployment
Unemployment that occurs as a result of
changes in technology, consumer
preferences, or in the way the economy
is “STRUCTURED.”
EX: Many TV repairmen had to find new
work as televisions are now built with
transistors instead of tubes.
CYCLICAL Unemployment
This unemployment results from contractions in the economy.
This type of unemployment HARMS the economy more than any other types of unemployment. During the Great Depression, the
unemployment rate reached an all time high of about 25%.
As recently as 2009 and 2010, the unemployment rate reached 10.2%.
FRICTIONAL Unemployment
People who have decided to leave one
job and LOOK for another typically
better job.
Also, new entrants and re-entrants into
the LABOR FORCE.
Economists consider frictional
unemployment as a NORMAL part of a
healthy and changing ECONOMY.
SEASONAL Unemployment
This predictable unemployment
fluctuates as a result of HOLIDAYS, school
breaks, and industry PRODUCTION
schedules.
The Business Cycle
Unemployment is more severe when the economy
goes through a downturn
Economies go through a cycle of good times and
bad times – alternating periods of growth (upturns)
and recession (downturns)
This is called the Business Cycle
Changes on the Business Cycle
As Aggregate Supply and Aggregate Demand change, consumers and producers notice the effects of either rising or falling prices in the economy
Keep in mind, there is a ripple effect – as consumers see higher prices, they buy less, so producers produce less, so they lay off workers (so, then people spend even less or business try to save money and lower costs..) Do you see where this is going?
The reason this happens is because everything in the economy is CONNECTED!!!!!!!
So, What Causes a Recession? Economic downturns occur when there is some kind of
shock to the economic system
This could be a natural disaster, a war, a sudden rise in taxes or interest rates, etc…
This causes AD to shift left (decrease!), which begins a downturn in the economy!
In a smaller market, producers would just try lowering their prices – but, remember, Aggregate Supply doesn’t respond as quickly!
When this occurs for 6 months or more, economists say we are experiencing a recession
It will last until producers can lower prices and demand as well as production start to rise again!
Recovery and Depression When the economy starts to pick up again,
economists call this a recovery
It is the first sign of an upturn after a long period of
decline
If the economy experiences a recession that lasts a
long time or has a severe decrease in GDP,
economists say we are experiencing a depression
A depression usually involves extreme levels of
unemployment, severe decrease in Aggregate
Demand, and a drastic decrease in production
Business Cycle Fluctuations
Checkpoint Questions A recession is when:
a. Unemployment
decreases
b. Real GDP is
increasing
c. The economy is in
a contraction for
at least 6 months
d. Interest rates and
prices are on the
increase
Which price index is the
broadest measure of
price changes in our
economy?
a. Consumer Price
Index
b. Producer Price
Index
c. The implicit price
deflator
d. Industrial Averages
Index
Questions for Reflection What is the difference between intermediate goods
and final goods?
How does Gross Domestic Product (GDP) differ from
Gross National Product (GNP)
How does nominal GDP differ from real GDP?
Opener: Friday, February 5th
Crash Course - Macroeconomics
What Have We Learned So Far?
• GDP
• Definition
• Formula
• CPI
• Inflation
• Unemployment
• 4 Types
• Business Cycle
Today’s Learning Standard
SSEMA1 The student will illustrate the means by which
economic activity is measured Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of
households, businesses, government, and net exports
• Define Gross Domestic Product (GDP), economic growth,
unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand.
• Explain how economic growth, inflation, and unemployment are
calculated.
• Identify structural, cyclical, and frictional unemployment
• Define the stages of the business cycle, as well as recession and depression.
• Describe the difference between the national debt and
government deficits
Business Cycles Fluctuations in Real GDP are referred to
as Business Cycles.
The duration and intensity of each
phase of the Business Cycle are not
always clear.
Business Cycles are typical of Market,
Capitalistic economies due to the free
nature of those economic systems
Phases of the Business Cycle Expansion
Peak
Contraction
Trough
Expansions are periods of increasing
Real GDP.
Unemployment decreases, businesses
expand, and Personal Consumption
increases.
As expansions continue, there tend to
be upward pressures on prices
(inflation) and interest rates.
Expansions
A Word About Interest Rates The amount of money charged as a fee
for lending money.
The price of borrowing money.
As interest rates rise LESS consumers will
borrow money IF they are WILLING and
ABLE
As interest rates fall MORE consumers
will borrow money IF they are WILLING
and ABLE
Peak
A peak is a period when the economy
starts to level off.
Businesses postpone new investments,
and consumer saving tends to increase.
Rising prices and interest rates tend to
restrict purchases and investments,
often leading to a Contraction.
Contraction
A Contraction is a period of declining Real
GDP.
Consumer spending decreases, and
unemployment increases as businesses layoff
workers and shorten work hours.
Interest rates and prices level off, and often
decline during long contractions.
Recession:
Six months of declining Real GDP
Depression:
Twelve months of declining Real GDP
coupled with at least 15%
unemployment.
Long Term Contractions
Trough A Trough is the bottom of a
Contraction. Lower interest rates and
prices bring customers back to markets.
% Change in Real GDP
Contraction
Expansion
Peak
Trough
0%
Factors That Affect the Business Cycle
Business Investment: High levels of business
investment (capital good increases like
machinery and equipment) promote
expansion. Low levels of business
investment contribute to contraction.
Money and credit: When interest rates go
up, people borrow less, and less money is
circulating in the economy, thus
contributing to a contraction. (and vise
versa)
Factors That Affect the Business Cycle
Public Expectations: People will
increase their spending if they believe
the economy is strong. This helps
promote expansion.
External Factors: Like energy crisis and
war.
Economic Indicators Economic Indicators are specific
economic activities that have historically
been good indications of the general
cycle of the economy.
There are three types:
* Leading
* Coincident
* Lagging
Leading Economic Indicators
Economic activities that tend to change 3
to 6 months before the general economy
changes.
Examples:
Stock Market Orders for Durable Goods
Housing Starts # of new businesses
Money Supply Average workweek
Number of building permits issued
Coincident Economic Indicators
Economic activities that change at about the
same time the general economy (GDP)
changes.
Examples:
•Personal Income
•Industrial Production Levels
•Retail Sales
•Number of employed nonagricultural workers
AD and AS The Business Cycle depends on measures called
Aggregate Demand (AD) and Aggregate Supply (AS)
AD is the total amount of goods and services that all
of the consumers in an economy are willing to buy
AS is the total amount of goods and services that all
producers in an economy are willing and able to
make
These interact much like supply and demand in a small
market – laws still apply!
Except, we watch what happens to GDP (growth or
decline), not price!
Interaction of AS and AD Increase in Aggregate
Supply (AS ) Supply increases
Price decreases
Upturn in economy
Notice the change in GDP
Interaction of AS and AD Decrease in
Aggregate Supply
Supply decreases
Demand increases
Downturn in economy
Notice the change in GDP
Interaction of AS and AD
Increase in Aggregate Demand Increase in demand
Increase in price
Upturn in economy
Notice the change in GDP
Interaction of AS and AD Decrease in
Aggregate Demand Decrease in demand
Decrease in price
Downturn in economy
Notice the change in GDP
Interaction of AS and AD Notice the change in GDP in each graph!
GDP Goes Down
B & D
GDP Goes Up
A & C
Aggregate Supply AS is a little more complicated than simple
supply in the market
AS takes longer to respond to changes in
demand, and thus, it takes longer for the
prices of all goods and services to change
So, economists often use two different curves to
show AS: a short-run aggregate supply curve and
a long-run aggregate supply curve
In the short-run, AS responds to changes in
demand, in the long-run AS is limited by the natural
scarcity of an economy’s resources
Focus #1 Check Point The government begins
funding training programs
to teach computer repair
and website design to
unemployed adults.
Which kind of
unemployment would
such training help MOST?
a. Frictional
b. Seasonal
c. Structural
d. Cyclical
If aggregate demand
and real GDP are
beginning to fall and the
unemployment rate is
beginning to rise, what
conclusion can you
draw?
a. The economy is in an
expansion phase
b. The economy is facing a
downturn
c. The economy is in a
recovery
d. Aggregate supply is
increasing
Balance of Class
Unit 3 Test
If you made a C or lower, you can
do test corrections to earn back ½
of your points!
When you’re given your papers:
1. Write down the question
number you’re correcting
2. Write the question
3. Write the correct answer
Make sure to turn all your papers
in before you leave class.
Shark Tank Economics
If you made an “A” or a “B” on
your test – congratulations!
You can enjoy an episode of
Shark Tank and analyze what
happens to the entrepreneur and
their proposal.
Turn your Shark Tank paper in with
your Unit Papers for credit.
Opener: Monday, February 8th
Crash Course - Business Cycle
Focus #2 – Monetary Policy The student will explain the role and
functions of the Federal Reserve System.
Describe the organization of the Federal
Reserve System
Define monetary policy
Describe how the Federal Reserve uses the
tools of monetary policy to promote price
stability, full employment, and economic
growth.
Money, Money, Money! As you have learned, the economy
operates around money Before 1913, hundreds of national banks
could print as much paper money as they wanted, as often as they wanted!
They could also loan out money when times were good, or refuse to loan money when times were bad
These practices made huge profits for bankers, but greatly hurt the economy as a whole!
So, the government created a solution…
The Federal Reserve System A special bank, referred to as The Federal
Reserve (“the Fed”), was established in 1913
to help control the money supply (or, the
amount of money) in the economy
These tasks are called monetary policy – or, the
regulation of the amount of money available in
the economy
The Fed does this in order to promote economic
growth and full employment to limit the impact of
inflation and recessions
These are called the “goals” of monetary
policy!
Other Fed Responsibilities Another huge task that the Fed is responsible
for is controlling what the banks can and
cannot do
They do this to make sure that banks are all playing
by the same rules!
The most important job is to tell the banks how
much of their money must be held in the form of
reserves
Reserves are money that the bank must keep in
its vault instead of loaning out for a profit!
Why do you think it’s important for banks to hold
some money as reserves?
Structure of the Fed
The Fed is often discussed as the nation’s central bank – but, it is actually a system
The Federal Reserve System is made up of 12 different banks in various regions of the nation
Each of these banks is able to print paper money, called Federal Reserve Notes
The system as a whole is run by a Board of Governors, who are appointed by the U.S. President
The Chairman of the Federal Reserve is Janet Yellen
The monetary policy of the Fed is decided and enforced by the Federal Open Market Committee (FOMC)
Tools of Monetary Policy The FOMC regulates the money supply
by buying and selling securities, or bonds
Securities or bonds are documents issued by
the government for which you pay a set
price now, in exchange for a higher fixed
amount (called the “face value”) later
When securities are bought and sold, this is
called an “open-market operation”
A bond usually “matures” – or can be
exchanged for its face value – in 5, 10, or 20
years
Open-Market Operations When the economy is in a recession, the
Fed will buy securities itself
The money that it pays for these securities
then goes into the banking system, and
thus, increases the money supply to the
public
When banks have more money to lend,
they lower their interest rates
why do you think think?
Down the line, the point of the Fed’s actions
are to encourage economic growth!
Buying Bonds
Increases
money supply
Lowers
Interest Rates
Selling Bonds Decreases money supply Interest Rates Go Up
Remember Inflation? Sometimes, though, the problem in the
economy is that it’s growing too fast
This leads to a rapid increase in prices, and could
lead to overproduction
Then, the Fed will sell bonds to the public, and
keep the money they pay for them as
reserves in their vaults
This lowers the money supply available to the
public in order to curb inflation and control
production rates (leads to higher interest rates)
So, the use of securities is a give and take!
One More Task… The Fed may also regulate the money supply
through the discount rate
The discount rate is the interest rate that the Fed
charges other banks to lend them money
When the discount rate is high, banks don’t borrow
as much money and they charge higher interest to
the public (lower money supply)
When the discount rate is low, banks want to
borrow more money to make more profit on loans
(higher money supply)
Remember – the money supply is dependent
on the final result for the public!!
Let’s Switch Gears… Macroeconomic Theories to Know
Pre-1930’S Classical Theory
1930’s Keynesian Theory
1940-1950’s Monetarism Theory
1980’s – 1990’s Neo-Classical Theory
Also called:
Supply Side Economics
or
Reaganomics
Classical Theory
Associated With:
Jean-Baptiste Say (1767-1832)
Time Frame
Predominant economic theory until 1930’s
Description of Theory
Assumes highly competitive marketplace
with little or no government interaction
Assumes natural state of equilibrium at full
employment
Say’s Law: Supply creates its own Demand
Keynesian Theory Associated With
John Maynard Keynes who wrote “The General Theory of Prices and Equilibrium
Time Frame
1930’s
Description of Theory
There is no “natural” balance in the economy
Endorses the use of fiscal policy to influence
aggregate demand, which they believe is the
primary influence on employment & price levels
Fiscal Policy is the use of government taxing and spending
authorities to achieve economic goals.
Monetary Theory (Monetarism)
Associated With
Milton Friedman (Nobel Prize)
Time Frame
1940’s – 1950’s
Description of Theory
The supply of money in the economy will affect
interest rates therefore investment, and consumption.
Too much $$ results in inflation; too little in
unemployment.
Advocated a balance between $$ supply and
economic productivity and less gov’t involvement
Neo-Classical (Supply-Side) Associate With
Victor Canto
Ronald Reagan
Time Frame
1970’s – 1990’s
Description of Theory
Gained prominence during 1970’s “Stagflation”.
Re-focus on Aggregate Supply
Advocated:
Lower Taxes on business and investors
Increased privatization of gov’t programs
Decreased regulation of business
Focus #2 Check Point When the Federal Reserve
sells government securities, or
bonds, on the open market,
what effect does this action
have on the economy?
a. Increases money supply;
increases consumer demand
b. Increases money supply;
decreases consumer
demand
c. Decreases money supply;
increases consumer demand
d. Decreases money supply; decreases consumer
demand
Why does the Fed
require banks to
keep a percentage of their funds as
reserves?
a. To buy bonds
b. To balance the
budget
c. To supply cash
withdrawals
d. To ensure business
investments
Questions for Reflection
1. What is monetary policy?
2. What is the discount rate?
Opener: Tuesday, February 9th
Crash Course - The Fed and Monetary Policy
Learning Standard #3 – Fiscal Policy
The student will illustrate the means by
which economic activity is measured
Describe the difference between the
national debt and government deficits
The student will explain how the
government uses fiscal policy to
promote price stability, full employment,
and economic growth
Define fiscal policy
Explain the government’s taxing and
spending decisions
Measuring the Economy Review: What other ways have we discussed
that measure economic health?
Gross Domestic Product (GDP)
Unemployment (Unemployment Rate)
Inflation (CPI)
Many economists also measure the economy
by looking at the government’s budget
The government’s budget is based on how
much money it will spend compared to how
much money it will take in through taxes
What do you think is the goal of the budget?
The Deficit and Debt
If the government spends more money than it
takes in for the year, it is operating under a
budget deficit
This is more of a prediction – the idea that
the government will have less money in the
end
If the government has a deficit, it needs to
borrow money to finance the difference – this
is called the national debt
It is all of the money that the government
borrows to make up for the extra money it
spends!
The National Debt Like any borrower, the government must pay interest
on its debt
Today, a big chunk of the government’s tax
revenues go towards paying this interest (in other
words, taxes go towards paying for money that the
government has already spent)
Because money is going towards interest instead of
goods and services, these payments limit the growth
of the nation’s GDP
Thus, economists look at the deficit and debt to
continue measuring our economic health
Who Owes More??
China Owning USA
Fiscal vs. Monetary Policy
Fiscal Policy Like the Fed, the government also tries to
carry out actions that aim to promote
economic growth and stability
However, unlike the Fed, the government
can’t print money or directly control the
money supply (i.e. monetary policy)
Instead, the government can change its
taxing or spending decisions to try to
influence the economy
Taxing is directed towards consumers (increase
AD)
Spending is directed at producers (increase AD)
Taxing and Spending For example, if the economy is facing a
recession, the government may lower taxes for its citizens Think about it…what would be the
consumer response to this action? Why?
If the economy is facing a recession, the government may also increase its spending and buy goods and services from businesses Again, think about it…what would be the
production response to this action? Why?
Raising Taxes? Raising taxes on consumers is often
controversial, but it can sometimes help
the economy
Like limiting the money supply, raising taxes
could encourage consumers to decrease
their demand on producers
When consumers demand more than
producers can make, the result is shortages
and an increase in prices
So, sometimes, encouraging people to spend
less money could be a good thing!
A Safe Balance If the government cuts taxes and increases its
spending at the same time, this could lead to a
budget deficit
Government spending does speed up economic
growth in the short term, but it also increases the
debt
When the government has to spend taxes on the
debt, it decreases the amount of money available
to others and banks end up raising interest rates on
loans
So, then consumers spend less and AD goes down…
So, in short – regulating the economy through fiscal
policy is a complicated, controversial, and sometimes
self-defeating process
Wrap it Up! Crash Course - Fiscal Policy
Focus #3 Check Point If GDP is decreasing
and the
unemployment rate is increasing, which
fiscal policy should
the government
MOST likely use?
a. Increase taxes
b. Decrease taxes
c. Increase bank
reserves
d. Decrease spending
If the inflation rate is
rising too fast, which
fiscal policy would make the MOST
sense?
a. Increase taxes
b. Decrease taxes
c. Increase spending
d. Decrease bank
reserves
Unit 3 Review & Study Guide
When instructed, work within your assigned group
to complete your Unit 3 Review and Study Guide.