Transcript ECON-4.11-12.12 Fiscal Policy

CHAPTER 15
Government and the Economy: Fiscal and Monetary
Policy
AGENDA Wed 4/11 & Thurs 4/12
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Review HW (pg 350 #1-6; pg 353 #1-5)
QOD #27: Rising Up
Intro to Fiscal Policy
Expansionary Fiscal Policy
Keynesian Economics
Contractionary Fiscal Policy
Capitalism & Debt
EC #2
HW: pg 403 #1 a-f; #2-5
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EC #2 DUE: Thurs 4/19 & Fri 4/20
QOD #27: Rising Up
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As the inflation rate increases, the unemployment
rate decreases; and when inflation rate decreases
the unemployment rate increases.
Explain why this happens.
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Prices go up, Revenues go up
Employers can afford to hire more workers
Real world data supports this view:
In the 60’s, inflation and unemployment moved
in opposite directions.
In the 70’s, the inflation unemployment trade-off
disappeared for a few years.
What is Fiscal Policy?
Fiscal Policy: Changes government makes in
spending or taxation to achieve particular economic
goals.
 Types of Fiscal Policy:
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 Expansionary
fiscal policy: Government spending is
increased, taxes are reduced, or both.
 Can
cause crowding out
 Example:
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Contractionary fiscal policy: Government spending is
decreased, taxes are raised, or both.
 Can
cause crowding in
 Example:
Expansionary fiscal policy and unemployment
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High unemployment is due to people not spending
enough money in the economy.
 If
people spend more money
 firms sell more goods
 and they have to hire more people
 to produce more goods.
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To reduce the unemployment rate Congress should
implement expansionary fiscal policy.
 increase
govt spending and/or lower taxes
How can gov’t increase spending?
Infrastructure
 Education
 Military (National Defense)
 Healthcare
 Transfer Payments (Social Security/Welfare)
 Net interest on national debt 
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How does this help?
Increasing government spending will increase
money in the economy.
 As a result there will be
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 an
increase in total spending
 firms will sell more goods
 and need to hire more workers.
Keynes on the Economy
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John Maynard Keynes was considered one of the greatest
economists of all time. He argued that too little spending in
the economy was the cause of high unemployment.
He also was a vocal dissenter to WWI reparations.
Before Keynes, most thought firms would lower prices to
increase people to spend/buy.
However, Keynes argued: Low spending does not lead to
lower prices
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Businesses will cut jobs before they lower prices
Keynesian Critics
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Critics argue that Keynes, in his promotion of
expansionary spending, does not take into
account “crowding out.”
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Govt spends more, consumers/businesses spend less
Therefore, there will be little change in total
spending.
 Do you agree/disagree? Why?
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Contrationary Fiscal Policy and Inflation
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Economists argue that the way to lower prices in the
economy is to reduce spending using contractionary
fiscal policy (decreasing govt spending, raising taxes,
or both)
 Inflation is the result of too much spending in the
economy.
 Government
decreases spending = less spending in the
economy
 decrease in total spending = firms initially sell fewer
goods
 As a result of selling fewer goods, firms have surplus
goods on hand.
 What happens when there is a surplus of goods?
 Prices
go down!
References
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Arnold, R (2001). Economics in our times, 2nd edition.
Chicago, IL: National Textbook Company .
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http://www.michaelmeacher.info/weblog/keynes.jpg