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Fiscal Policy (Congress)

Explore the role of Congress in influencing the economy through fiscal policy, including tax and spending changes. Learn about the impact on GDP growth and the different types of unemployment. Quiz reviews included.

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Fiscal Policy (Congress)

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  1. Fiscal Policy (Congress) Government Intervention in the Free Market?: How Congress can try to the economy speed up or slow down

  2. Review Quiz #1: TRUE or FALSE John Maynard Keynes was one of the classical economists. FALSE.

  3. Trade Quiz Review Quiz #2: What did the classical economists believe about the economy? That the economy is self-regulating, that recessions are temporary, and that government intervention in the economy is unnecessary & undesirable.

  4. Review Quiz #3: What are the four types of unemployment? Structural Cyclical Frictional Seasonal

  5. Review Quiz #4: What is full employment? Between 4 and 5 percent unemployment

  6. Review Quiz #5: What are the three stages of the Aggregate Supply Curve? Recession Sweet Spot Vertical—inflation too high

  7. Fiscal Policy Fiscal Policy is the Congress’s attempt to influence GDP growth through changing tax and spending policy • Keynes believed recessions could be permanent • Argued investment by Government can moderate the “ups & downs” of business cycle

  8. Inflation AD1 GDP Review: Aggregate Demand (AD) Aggregate-demand curve (AD)- the demand curve for the entire economy

  9. (1) Flat:Recession Economy is growing too fast AS1 Sweet spot Review: 3 Phases of AS Curve • Aggregate-supply curve (AS)- the supply curve for the entire economy Inflation 3 2 1 Real GDP

  10. AD/AS Model AS1 AD1 AD1 AD1 Draw the AD curve on the appropriate section of the AS curve based on the economic situation Inflation Real GDP

  11. AD/AS Model AS1 AD2 AD1 AD3 Draw the AD curve on the appropriate section of the AS curve based on the economic situation 1. UNEMPLOYMENT 3% GDP GROWTH TOO FAST Inflation 2. RECESSION 3. UNEMPLOYMENT 5% GDP GROWTH MODERATE Real GDP

  12. AD AD 2 Types of Fiscal Policy • Expansionary Policy Goal: • Contractionary Policy Goal:

  13. Expansionary Fiscal Policy • Goal: to increase AD (speed up circular flow) • How: • Increase Gov’t Spending • --Job training programs • --Infrastructure projects (building schools, fixing bridges/roads/levees, etc.) • --Unemployment benefits • 2. Decrease Taxes (especially personal income taxes)

  14. Restrictive/Contractionary Fiscal Policy • Goal: to decrease AD (slow down circular flow) How: 1. Decrease Gov’t Spending --Cut spending by various Cabinet Departments --Cut Infrastructure projects (building schools, fixing bridges, etc.) --Cut research and development funding 2. Increase Taxes (especially personal income taxes)

  15. Inflation AD1 GDP Shifts in AD • Sample Shifts in AD: • Congress increases spending on repairing interstate highways and unemployment benefits • ---AD shifts right • Government (Congress) raises taxes • ---AD shifts left AD2 AD3

  16. Sample Problem Expansionary fiscal policy needed AS1 Lower Taxes & ↑ Gov’t spending AD1 AD2 AD shifts right End result: higher GDP, more Jobs & slightly higher inflation What should be done regarding taxes and spending? Type of fiscal policy needed? Economy in recession --where does the AD curve cross the AS curve? Inflation Real GDP

  17. Aggressive Contractionary Cut Spending Decrease AD Raise Taxes Decreases Deficit Moderate Expansionary Increases Deficit Increase AD Cut Taxes Increase Spending None OR Decrease AD None OR Decrease Deficit Take No Action OR Moderate Contractionary No Action OR Raise Taxes No Action OR Cut Spending Moderate/Aggressive Expansionary Increase AD Cut Taxes Increase Spending Increases Deficit None OR Decrease Deficit Take No Action OR Moderate Contractionary No Action OR Raise Taxes None OR Decrease AD No Action OR Cut Spending

  18. AS1 Cautionary Reminder:Economic Speed Limit Inflation Real GDP Conclusion of vertical AS: The economy has a speed limit. If it grows too fast, you will end up with inflation and no increase in GDP (section 3 of AS curve)

  19. More Practice Inflation at 0.5%, Unemployment at 8.2% Price Level (Inflation Rate) AS Decrease _________ Taxes _________ Gov’t Spending Increase AD1 AD2 GDP

  20. Still More Practice Inflation at 9%, Unemployment at 3% Price Level (Inflation Rate) AS Increase _________ Taxes _________ Gov’t Spending Decrease AD1 AD2 GDP

  21. 4-Types of Unemployment • Structural • Skills do not match demand for labor • Cyclical • Too low a level of aggregate demand • Frictional • Temporarily between Jobs • Seasonal • Out of work based on time of year

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