Transcript What is fiscal policy? - Ms. Smith`s economics

Macroeconomics
Unit 4
What is macroeconomics?
Macroeconomics is the study of the economy as a whole.
So – what will we talk about in this unit?
 Inflation/Deflation
 Unemployment
 GDP/GNP
 Fiscal policy
 Monetary policy
 Functions of money
 ...and probably a lot more stuff!
GDP
Let the learning commence!
First, let's talk about GDP and GNP...
Gross Domestic Product (GDP): measure of a country's total
output
GDP = C + G + I + NX
GDP
So...let the learning commence!
First, let's talk about GDP and GNP...
Gross Domestic Product (GDP): measure of a country's total
output
GDP = C + G + I + NX
GDP
Why do we care about the GDP?
GDP is an indicator of how fast an economy is growing.
 GDP is calculated quarterly
 If a GDP is lower than the last quarter, this signals a recession.
 If a GDP is growing to fast it can lead to inflation
What is macroeconomics?
2012:
 Q1 – 5.8%
 Q2 – 3.0%
 Q3 – 4.9%
 Q4 – 1.6%
2013:
 Q1 – 2.8%
 Q2 – 3.1%
 Q3 – 6.2%
 Q4 – 4.2%
GNP
Gross National Product (GNP): GDP, money
earned by citizens abroad, less money earned
domestically by foreign residents.
Functions of Money
What is money?
Functions of Money
Money has three forms in our economy. The
first is known as...
M1 – cash, medium of exchange. This
includes “demand deposits”, or debit and
credit transactions.
Functions of Money
The second is...
M2: M1 + “near money”
 Near money includes savings deposits,
money market mutual funds, and other
deposits.
M2 can be quickly converted to M1
Functions of Money
The third is...
M3: M2 + corporate investments.
M3 refers to a store of value.
The US Federal Reserve no longer tracks M3.
Hyperinflation
Hyperinflation: out of control inflation
As central banking authorities increase the money
supply, the value of money falls. In some cases this
results in hyperinflation.
Effects of hyperinflation…
Hyperinflation
Germany after WWI
Prices quadrupled each month during the 16 months
after the war when hyperinflation occurred.
Hyperinflation
Inflation
Inflation: the rate of rising prices and falling
purchasing power
As inflation rises, each dollar will purchase a
smaller percentage of a good.
Hyperinflation
Hungary after WWII
Prices rose 19% PER DAY!
DEflation
Deflation occurs when prices fall.
Money is DEvalued
Usually caused by reduction in the money supply
or available credit.
DEflation
Deflation can cause...
Unemployment due to closing factories, lay
offs, lack of available credit, lack of demand for
goods and services.
Unemployment
Unemployment is defined by economists as a
condition that occurs when a person actively
seeking employment is unable to find employment.
Unemployment
Keynesian
Neoclassical
There is always a
“natural rate” of
unemployment.
Skills of workers and
available work will always
be out of sync.
Labor market is efficient
when outside forces do
not become involved.
Government activity
such as minimum wage
and labor organization put
supply and demand out of
sync.
Regardless of which school of thought you belong to, it is widely
accepted that unemployment is natural and unavoidable.
Unemployment
How is the unemployment rate measured?
First – the labor force is measured as the amount of people 16 or older
who are working or looking for work.
So...Here is how the Bureau of Labor Statistics calculates the monthly
unemployment numbers.
Unemployment
Costs of Unemployment...
Individual...
...Society...
…...Country...
http://www.washingtonpost.com/politics/economic-ups-and-downs-ofthe-presidency/2012/09/01/e4c8668c-f47d-11e1-adc687dfa8eff430_graphic.html
Fiscal Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• The unemployment rate has been
steadily increasing for the past 16
months. Deflation is occurring.
How might the government adjust
fiscal policies to shift the
economy?
Fiscal Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• Trouble at the Hoover Dam! Two
of the walls have been damaged
after mutant eagle attacks. The
government needs to rebuild the
walls very quickly. What are the
fiscal policy effects of rebuilding
the walls?
Fiscal Policy
What is fiscal policy?
Fiscal policy is how the government
attempts to influence macroeconomic
conditions.
This is done through taxation and
government spending.
Fiscal Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• The government has created a
jobs program to provide all
teenagers with summer
employment. This boosts the
number of workers in the labor
force. What are the fiscal policy
ramifications of this action?
Fiscal Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• The economy has experienced a
severe depression. To combat
this the government begins work
on a long term technology
project. The project will increase
government spending and lower
the unemployment rate. Describe
the positive and negative aspects
of this endeavor from a fiscal
policy standpoint.
• What is the effect of this on the
GDP?
Fiscal Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• Devise a scenario which would be
impacted or created by fiscal
policy. Be prepared to share your
scenario with the class for
discussion.
Monetary Policy
What is monetary policy?
Monetary policy consists of actions
taken by the central banking authority
to maintain or change the money
supply.
This is typically done through interest
rates and changing required bank
reserves (amt of cash a bank is
required to have on hand).
The Federal Reserve (The Fed)
Monetary Policy
The Fed's Toolbox of Monetary Regulation
1. Reserve Requirements – how much cash a bank must have on
hand. (10%)
2. Federal Funds Rate – the rate at which banks lend each other
money to meet reserve requirements.
3. Discount Rate – the rate at which banks borrow money from
their Fed branch.
4. Discount Window – Allowing banks to borrow money from the
Fed.
Monetary Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• The Fed has decided to
implement a contractionary policy
by raising the reserve
requirement. How does this
monetary policy impact the
money supply?
• Is this likely to create inflation or
deflation?
Monetary Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• The Fed is closing the discount
window, forcing banks to keep
their own reserves or borrow from
one another. What impact will
this have on the GDP?
• Is this likely to cause higher or
lower unemployment?
Monetary Policy
On a separate sheet of paper (and
individually), respond to the following
scenarios...
• Devise a scenario which would be
impacted or created by monetary
policy. Be prepared to share your
scenario with the class for
discussion.