WARM-UPFirst, explain the difference between the supply curve

and the aggregate supply curve. Second, draw and label an aggregate supply curve.

Stabilization PoliciesChapter 15 Section 2

MedicareFederal health care program for senior citizens, regardless of

incomeFiscal Policy

Use of Government spending and revenue collection measures to influence the economy

Derived from Keynesian EconomicsGovernment spending and taxation policies

suggested by John Maynard Keynes to stimulate the economy

Demand-Side Policies

Keynesian EconomicsOutput-Expenditure Model:

GDP=C+I+G+FF= Foreign SectorG= Government SectorC= Consumer SectorI= Investment (Business) Sector

MultiplierMagnified change in overall

spending caused by a change in investment spending

AcceleratorChange in investment spending

caused by a change in overall spending

Role of GovernmentIndirect role by lowering taxesBig enough to offset changes in investment-sector

spending

Automatic StabilizersAutomatic Stabilizers

Program that automatically provides benefits to offset a change in people’s incomes

EntitlementsBroad social program that uses established

eligibility requirements to provide health, nutritional, or income supplements to individuals

Unemployment InsuranceGovernment program providing payments to

unemployed workers

Supply-Side PoliciesEconomic Policies designed to

stimulate the economy by increasing productionSame goal as demand side policies

Smaller Role for GovernmentReduces the role of the government 3 ways

DeregulationRelaxation or removal of

government regulations on business activitiesLower Federal Taxes

Laffer CurveHypothetical relationship between

federal income tax rates and tax revenuesLimitations of Supply-Side Policies

Difficult to predict

Supply-Side Policies

Monetary PoliciesMonetarism

School of thought stressing the importance of stable monetary growth to control inflation and stimulate long-term economic growthShort Run Impacts

Contractionary Monetary PolicyExpansionary Policy

Long Run ImpactsFuture InflationWage-Price Controls

Policies and regulations making it illegal for firms to give raises or raise prices without government permissionUse of Monetary Policy

Gradual