Transcript Expansionary Fiscal Policy

GDP
Know all
terms on
Business
Cycle
Where are
we now?
Long term
growth trend of
RGDP = 3%
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What are the problems/concerns on the downward slope?
GDP? CPI? Unemployment?
Solution?
Government –
Expansionary Fiscal Policy (Fiscal –
of/or relating to govt.)
Tools: Decrease Taxes / Increase Govt. spending {Goal?}
Federal Reserve –
Expansionary Monetary Policy
Tools: Decrease Interest rates (increase money supply) {Goal?}
GDP
Long term
growth trend =
3%
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What are the problems/concerns near/at peak?
GDP? CPI? Unemployment?
Solution?
Government –
Contractionary Fiscal Policy
Tools: Increase Taxes / decrease Govt. spending {Goal?}
Federal Reserve –
Contractionary Monetary Policy
Tools: Increase Interest rates (decrease money supply) {Goal?}
WHOWHATWHEN
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Who?
Govt. or Fed Reserve
What? (Tools?)
(G spending or taxes [up or down]) or
Interest Rates [up or down]
• When?
• When would the government and or fed.
use the tools they have / under what
circumstances?
Economic Costs of Unemployment
• Unemployment keeps society from reaching its
PPF
• Unemployment = lost output = “GDP Gap” =
difference between Potential GDP and Actual
GDP
Okun’s Law
• For every 1% unemployment above NRU
• = 2.5% GDP Gap
Actual unemp 7% - 5.5% = 1.5 %
1.5 x 2.5 = 3.75% gap
NRU =
5.5%
Actual unemployment
• The unemployment of 7% created a 3.75% loss
of GDP
• Can have a “negative gap”