CHAPTER 15Government and the Economy: Fiscal and Monetary Policy

AGENDA Wed 4/11 & Thurs 4/12 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

EC #2 DUE: Thurs 4/19 & Fri 4/20

QOD #27: Rising Up As the inflation rate increases, the

unemployment rate decreases; and when inflation rate decreases the unemployment rate increases.

Explain why this happens. 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: Expansionary fiscal policy: Government

spending is increased, taxes are reduced, or both. Can cause crowding out Example:

Contractionary fiscal policy: Government spending is decreased, taxes are raised, or both. Can cause crowding in Example:

Expansionary fiscal policy and unemployment 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.

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

How does this help? Increasing government spending will

increase money in the economy. As a result there will be

an increase in total spending firms will sell more goods and need to hire more workers.

Keynes on the Economy 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 Businesses will cut jobs before they lower prices

Keynesian Critics Critics argue that Keynes, in his

promotion of expansionary spending, does not take into account “crowding out.” Govt spends more, consumers/businesses spend less

Therefore, there will be little change in total spending.

Do you agree/disagree? Why?

Contrationary Fiscal Policy and Inflation 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 economydecrease in total spending = firms initially sell

fewer goodsAs 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 Arnold, R (2001). Economics in our

times, 2nd edition. Chicago, IL: National Textbook Company .

http://www.michaelmeacher.info/weblog/keynes.jpg