Transcript 2. What are automatic stabilizers?

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Bellwork- Review Questions
Automatic Stabilizers vs Discretionary Fiscal Policy
Falling Deficit Article
Economic Theories Notes
Keynes and Hayek Video
Keynes and Hayek Comparison
OUTCOMES
 Students will contrast the economic theories of Keynes
and Hayek regarding the use of fiscal policy
 Students will determine how the Federal Reserve uses
monetary policy to correct economic instability
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Class average 75%
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Most commonly missed question
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7. Limitations of Fiscal Policy- True or False: Oftentimes, the
government is very quick to enact fiscal policy, as it strives to
fix the economy as swiftly as possible.
1. Which institution is in charge of fiscal policy?
◦ A. Government
2. What are the two tools the government uses
in fiscal policy to affect the economy?
◦ B. Government Spending
◦ C. Taxation
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3. What type of fiscal policy should be used in
a recession?
 A. Expansionary
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4. What type of fiscal policy should be used in
a period of inflation?
 B. Contractionary
5. In contractionary FP, does the government want to increase
or decrease aggregate demand?
◦ B. Decrease
6. In contractionary FP, how does the government help the
economy??
C. Increased taxes
Decreased government spending
7. In expansionary FP, how does the government help the
economy?
D. Decreased taxes
Increased government spending
Difference between Discretionary FP
and Automatic Stabilizers
Fiscal Policy Notes pgs. 3-4
Discretionary Fiscal Policy
• What does the word discretionary mean?
– Choose, optional
1. What is discretionary fiscal policy?
• Actions taken by the government by choice to correct economic
instability
– What active government responses are part of Discretionary FP?
A) Congress choosing to change taxes
B) Congress choosing to change government spending
Automatic Stabilizers
2. What are automatic stabilizers?
– Features of fiscal policy that automatically stabilize the
economy (such as public transfer payments)
• What is a public transfer payment?
– Money the government transfers (gives) to the public
– Ex: Unemployment compensation, food stamps
Challenge Question!!
1. Which type of fiscal policy involves an active
government choice to make changes to the
economy?
A. Automatic Stabilizers
B. Discretionary Fiscal Policy
Automatic Stabilizers
3. How do public transfer payments automatically stabilize the
economy in a recession?
– More people qualify for government benefits like food stamps in a recession.
– They get more money to spend from the government
• This increases aggregate demand and helps the economy
4. How do public transfer payments automatically stabilize the
economy when it is growing too fast (inflationary period)?
– Economy is doing well so fewer people qualify for benefits like food stamps
– This takes $ out of the economy, which reduces aggregate demand, and keeps
prices from rising
Automatic Stabilizers
5. How do progressive income taxes act as automatic stabilizers during
prosperous times?
• When a person’s salary increases they pay more taxes. Taxes
prevent some of this increased income from entering the economy,
which keeps inflation in check.
6. How do progressive income taxes act as automatic stabilizers during
a recession?
• People make less, they pay less in tax, which reduces impact of
recession
Challenge Question!!
2. During an inflationary period, would
automatic stabilizers such as food stamps
increase or decrease?
A. Increase
B. Decrease
Less money in the
economy= stability
Challenge Question
3. Considering that income taxes are an automatic
stabilizer, how could your tax bracket change during a
recession?
A. Many people move up a tax bracket and pay more in
taxes
B. Many people move down a tax bracket and pay less in
taxes
Recession
Challenge Question
• Matching:
4) Congress decided to make changes
to taxation
A. Automatic Stabilizers
B. Discretionary Fiscal Policy
5) Unemployment compensation
increases during a recession
Article: Falling Deficit
• Before Reading…
• Question: What is the difference between the federal debt
and federal deficit?
– The deficit is the fiscal year difference between what the United
States Government takes in from taxes and other revenues, and
the amount of money the Government spends.
– Ex: the government takes in $10 billion in taxes and revenue,
but spends $15 billion
– The debt is our accumulated deficits plus that we have acquired
over the years.
• the problem is that the government continues to spend more money
each year than it takes in, causes us to have deficits every year.
Smith, Keynes and Hayek
Pg. 4 of Standard 7 Notes packet
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Adam Smith (1723-1790)
◦ Scottish political economist
◦ Father of economics
◦ Wrote The Wealth of Nations
 Government does not need to
control economy
 Economies self-regulate
according to supply and
demand
◦ LAISSEZ FAIRE (French, “let
do” or let it be, leave it
alone)
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John Maynard Keynes
(1883-1946)
 British academic and
government economist
 Introduced the idea of
using government action
to stimulate aggregate
demand
 Wrote “The General Theory
of Employment, Interest
and Money” which marked
the beginning of the field
of macroeconomics
 GOVERNMENT
INVOLVEMENT
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Friederich von Hayek (1899-1992)
◦ Austrian-British economist and political philosopher
◦ Considered to be one of the 21st century’s most
important economists and philosophers
◦ Argued for the classical economic view: less government
and more freedom in the marketplace
 In times of distress, eventually the economy will fix itself
 No need for government interference
◦ LAISSEZ FAIRE
6. Which economist do you think would
advocate using fiscal policy to fix problems in
the economy?
A. Keynes
B. Hayek
7. Why would Hayek be against using fiscal
policy to fix the economy?
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In Fear the Boom and Bust, two famous
economists from the Great Depression years John Maynard Keynes and F. A. Hayek - come
back to life to attend an economics conference on
the 2008-2010 recession.
Before the conference begins, they go out for a
night on the town and rap about why there's a
"boom and bust" cycle in modern economies.
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Use of expansionary fiscal policy to solve a
recession
Use of expansionary monetary policy
◦ Low interest rates, cheap credit
◦ Goal is to get $$$ into the economy by the Federal
Reserve through setting low interest rates
◦ Who is for this low interest? Who isn’t?
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Challenge Question #8: How were the boom
and bust illustrated on this video?
http://network.nationalpost.com/np/blogs/f
ullcomment/archive/2010/01/29/fear-theboom-and-bust-lyrics-waiting-for-recoveryseriously-that-s-outrageous.aspx
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Challenge Question #8: How were the boom and bust
illustrated on this video?
Keynes
How does the economist feel
about control of the markets?
What does the economist
blame for economic
problems?
How does the economist feel
about using government
spending to boost aggregate
demand during a recession?
How does the economist feel
about saving versus
spending?
How does the economist feel
about expansionary
monetary policy (low interest
rates; cheap credit)
Hayek
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Which economist do you agree with the most
regarding the use of fiscal/monetary policy?
Why?