60 fiscal policy

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Week of APRIL 11, 2011 AGENDA

1. Today’s Do Now2. Hand-out Personal Finance WB3. Notes: Fiscal Policy4. CW: Fiscal Policy WS5. CW: Demand vs. Supply Side

Do Now (EOCT Review)

1. __________ are defined as all of the combination of goods and services that can be produced with a fixed amount of resources.

A. production possibilities B. factors of production C. opportunity costs

2. Which of the following is a factor of production?

A. Scarcity B. Full Employment C. Entrepreneurship

3. The central problem with which the discipline of economics is concerned with is

A. excess B. scarcity C. selfishness

4. The value of the next best alternative that is given up when one makes an economic decision is called the

A. opportunity cost B. trade-off C. minimal outcome

Georgia Performance StandardsSSEMA3 (Social Studies Economics Macro #3)

The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth.

a. Define fiscal policy.

b. Explain the government’s taxing and spending decisions.

I. Macroeconomics: Fiscal Policy

Definition: Fiscal Policy

• Refers to those decisions by government related to

1. government spending

2. taxes

A: Expansionary Fiscal Policy

Stimulates growth

Govt Spending

Taxes = GROWTH

Increasing gov’t spending fights against recession and

unemployment

Ripple EffectWhen Gov’t spends $ for G/S, it increases overall(aggregate) demand in the economy

Increasing business activity and economic growth

GA OFFERS KIA 400M INCENTIVE

RIPPLE EFFECT

Pays land Owners 35.7 M-2200 Acres

Construction/ Buy New Homes

Consumer Goods

RIPPLE EFFECTGA OFFERS KIA 400M INCENTIVE

Contractors for building

Hire Workers

Suppliers Buy Goods

Buy Consumer Goods

Hire Workers-2000

Buy Consumer Goods

RIPPLE EFFECTGA OFFERS KIA 400M INCENTIVE

2500 Workers

Buy Consumer Goods

Suppliers- 2,000 workers

Hire Workers

Buy Consumer Goods

B. Contractionary Fiscal Policy

Reduces Growth

Gov’t

SpendingTaxes = Slows

growth

Contractionary

1. fights against inflation

2. As demand continues to rise so do prices (D-up P- up)- & inflation threatens

3. Gov’t can then reduce spending and reverse the ripple effect

Contractionary

• INCREASING TAXES FIGHTS AGAINST INFLATION!!

Complete the Fiscal Policy Worksheet

CW 4/12/10 Demand vs. Supply Side:You have been assigned either demand-side orsupply-side economics. Answer #’s 1-3 from your assigned

viewpoint. Use pages 447-454 of your textbook to assist you. Some answers may be based on general knowledge.

1. Who is the main advocate (historical character) for this viewpoint?

2. What political party today most closely associates with this viewpoint?

3. The U.S. is headed for a recession. In regards to fiscal policy, what should the government do? (List at least 2 specific examples)

4. Was the New Deal based on demand-side or supply-side economics? How do you know?

5. Do you think that demand-side or supply-side economics is best? Why?

John Maynard Keynes1. Father of Macroeconomics

2. 1883- 1946

3. Advocated an aggressive role for the gov’t in a national economy- this is opposite of Adam Smith and laissez-faire

MACROECONOMIC THEORIES

Keynesian Economics

• Demand Side Economics– Major concern of macroecon is to ensure

aggregate demand is adequate to employ all productive resources (aggregate supply)

– To cure a recession / depression only the govt has the spending capacity to jolt aggregate demand

– The massive spending for WWII cured the Great Depression

Reganomics= Supply Side Economics (1980’s)

• 1. Aim was to stimulate business and industry

• 2. Major tactics – A. Cut individual tax rates– B. Cut taxes on unearned income (like

dividends)– C. Business tax incentives– D. Deregulation of Business – reduction of

federal agency rules governing business

MODEL OF THE BUSINESS CYCLE

Prosperity

Recession

Trough

Peak/BoomUnemploymentLowest, Real GDP stops growing Slow

P declines for

2 consecutive quarters

or 6 monthsDepression/Lowest PointUnemployment Highest, Real GDP stops decreasing, Acute shortages & excess in manufacturing

60 fiscal policy

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