Transcript here - Chandler Unified School District

Ch. 15/16
Fed. Gov’t uses
2 strategies to fight inflation
and/or unemployment to promote a healthy,
growing economy:
Fiscal
policies (Ch. 15)
Monetary policies (Ch. 16)
Unemployment &
slow growth?
expansionary policies to increase output
Inflation?
contractionary policies to slow output
Ch. 15 Fiscal Policy
Fiscal Policy defined:
The use of gov’t spending
and
taxing to influence the economy
To understand FP
economics, one must know
the 20th century’s most brilliant economic
theorist…
John Maynard Keynes
Cambridge Univ. professor…world’s leading
econ thinker in the 1930’s
Keynesian Economics = “Demand Side Economics”
Gov’t. should use
its power to tax and to spend to
affect AGGREGATE
DEMAND
Problem: Inflation
gov’t. should raise
taxes to decrease the amount of
money individuals and businesses have available
to spend (recall the 2nd of the 3 criteria of
“demand”…that you have the $ available)
Similarly,
gov’t. should lower its spending to
decrease available income.
Less income
= less spending by business and
individuals
lower demand
prices
Keynesian Economics
(“demand-side economics”)
We
have talked about inflation only…what about
Problem: Unemployment
During recessions, gov’t.
1. spends to create jobs + income
- income gets spent which stimulates the
economy.
2. Decreases taxes to make more $
available to biz and individuals
Limits of Fiscal Policy
Increasing gov’t. spending is
not so simple:
1. 60% of fed’l. budget goes to entitlement
programs which are fixed by law (programs like
Social Security, Medicare, veteran’s
benefits)…gov’t cannot alter these payments.
So…any change in fed’l spending must come from
only ~ 40% of what is in the fed’l budget
Quick Summary so far:
Keynesian economics = “Demand side economics”
Gov’t.
uses authority to tax & spend to
influence aggregate demand:
1.
2.
When demand is weak, GDP growth is slow, …
reduce taxes and/or increase spending
When demand too strong GDP grows too fast,
… raise taxes and/or cut spending
A VERY important thing to add…
A
“balanced budget” means that you only spend
what you have…what if increasing fed’l. spending
will cost more than what is collected in taxes?
That is
called “deficit spending”… an important
pillar of Keynesian economics
He
argued that gov’t. MUST borrow the $ if
necessary!
A political football ?
As
we have seen so clearly during
the Obama presidency, gov’t.
spending is viewed differently by
Democrats and Republicans
(generally)
Keynesian econ applied:
During our recent recession, what course
of action did the Obama administration
push?
How did Republicans respond?
Economics & Politics
As a VERY general statement, Democrats
accept Keynesian economics…that
government intervention is needed to cure an
ailing economy…
Lawrence O’Donnell: host of
The Last Word (MSNBC)
Economics & Politics
And generally speaking, Tea Party
supporters disagree w/Keynesian
economics…that an economy free of gov’t.
intervention is the answer…
Rep. Steve King (R-Iowa) at the 2010
Virginia Tea Party Convention
Supply - Side Economics
Stresses
influence taxes have on the economy
The concept: lower tax rates will lead to higher output
(supply will increase)…how?
Will lead to higher employment
Popularized by Pres. Ronald Reagan in 1980s
AKA: “trickle-down” economics OR “Reaganomics”
A different strategy:
Ch. 16
Monetary policy
Monetary Policy
Gov’t uses the Federal Reserve
to affect the economy…
The Federal Reserve
“the
Fed”
Federal Reserve System created 1913
- USA divided into 12 districts… each has a
federal reserve bank
- all US banks belong to the system
What does the Fed do ?
The Federal Reserve has 3 primary goals
Maintain long term economic growth
Maintain stable price levels
Maintain full employment
Main Functions of the Fed
1. Set the Capital Reserves requirement
the % of deposits banks must maintain in
cash

2. Set the “discount rate”
the interest rate banks pay to the Fed to
borrow money (int. rate on consumer loans
are tiered above this!)

Fed Functions (con’t.)
3. Open Market Operations*

Controlling the money supply…
1.
2.
*
Expansionary policy: Fed buys U.S. bonds to
increase money supply which stimulates the
economy
Contractionary policy: Fed sells U.S. bonds to
decrease money supply which slows the
economy
Most used, most important “tool”
The Fed buys securities when it wants to increase the
supply of money and credit, and sells securities when it
wants to reduce the flow
Applying Monetary Policy
Slow growth? (and unemployment is
a problem), the Fed should adopt:
(choose one)
(A) expansionary policy
(B) contractionary policy
Applying Monetary Policy (con’t.)
To expand (stimulate growth) the economy
the Fed could/should:
1. Reserve Reqs: LOWER them
2. Discount Rate: LOWER it
3. Open Mkt Ops: BUY BONDS
Applying Monetary Policy
When inflation is a problem, the Fed
should adopt: (choose one)
(A) expansionary policy
(B) contractionary policy
Applying Monetary Policy (con’t.)
To slow growth of the economy the Fed
could/should:
1. Reserve Reqs: RAISE them
2. Discount Rate: RAISE it
3. Open Mkt Ops: SELL BONDS
A few last thoughts on Monetary Policy
As
we already discussed, the Federal Reserve is
the key player
It sets a key interest rate (called the discount rate:
what banks pay to borrow from the Fed)
The
Prime Rate (what consumer loans are based
on) is tiered above the Fed Funds rate
 All interest rates (mortgages, car loans, credit
cards, etc.) will move up or down as the Fed
raises or lowers the Discount rate)
3 Names to know:
Monetary
Policy = Milton Friedman
Fiscal Policy = John Maynard Keynes
 New Chairman of he Federal Reserve:
Janet Yellen
Classical Economics
What makes both fiscal policy and
monetary policy significant is that they
each mark a huge departure from
“classical economics”

The heart of classical economic theory is
that:
1. free markets will regulate themselves
thru the natural interaction between supply
and demand…markets will naturally seek
equilibrium
2. gov’t. intervention is NOT needed
Adam
Smith…David
Ricardo…Thomas Malthus were the
major architects of this theory that
dominated economic theory and
gov’t policies for more than a century
The
Great Depression challenged
this line of thinking because…
Connecting the dots…
During the
Great Depression, aggregate
demand plummeted…and prices followed
Classic econ says that demand should rise
with low prices which should cause
producers to produce more, creating a
need for higher employment…but it didn’t
Keynes argued that
neither business nor
consumers had the ability or desire to
spend
Government MUST be the catalyst…it
was the only entity that had the ability to
spend to stimulate the economy
So…gov’t. can intervene with either
fiscal policy, monetary policy, or both….
Tying it all together
Keynes
argument that gov’t.
MUST act to “steer the economy”
v. “free market” argument that
favor less gov’t. action and
allowing S+ D to work naturally
Unemployment?
Gov’t:
1.
2.
3.
4.
5.
Lower int. rate
Reduce capital reserve req
Buy gov’t. bonds
Increase spending
Reduce taxes
Inflation?
Gov’t:
1.
2.
3.
4.
5.
Raise int. rate
Increase capital reserve req
Sell gov’t. bonds
Decrease spending
Raise taxes
Chap. 15/16
Quiz
Monday, April 27th
Do the reading (including the
“supplemental readings”)
Do the Study guide
You can use the note card (no extra
credit for creating one)