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Unit 3: Aggregate Demand and Supply and Fiscal Policy

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Unit 3: Aggregate Demand and Supply and Fiscal Policy * Identify the two types of tool boxes the government has to fix the economy Explain and give examples of ... – PowerPoint PPT presentation

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Title: Unit 3: Aggregate Demand and Supply and Fiscal Policy


1
Unit 3Aggregate Demand and Supply and Fiscal
Policy
1
2
Review
  1. Identify the two types of tool boxes the
    government has to fix the economy
  2. Explain and give examples of Expansionary Fiscal
    Policy
  3. Explain and give examples of Contractionary
    Fiscal Policy
  4. Explain the Multiplier Effect
  5. Explain how to calculate the spending multiplier
  6. Name 10 University Mascots

2
3
Draw and Practice
Congress uses discretionary fiscal policy to the
manipulate the following economy (MPC .9)
  1. What type of gap?
  2. Contractionary or Expansionary needed?
  3. What are two options to fix the gap?
  4. How much needed to close gap?

LRAS
AS
P2
Price level
AD1
AD
-5 Billion
50FE 100
Real GDP (billions)
3
4
Draw and Practice
Congress uses discretionary fiscal policy to the
manipulate the following economy (MPC .8)
  1. What type of gap?
  2. Contractionary or Expansionary needed?
  3. What are two options to fix the gap?
  4. How much initial government spending is needed to
    close gap?

LRAS
AS
Price level
P1
AD2
AD1
40 Billion
800 1000FE
Real GDP (billions)
4
5
Problems With Fiscal Policy
5
6
Problems With Fiscal Policy
  • When there is a recessionary gap what two options
    does Congress have to fix it?
  • Whats wrong with combining both?
  • Deficit Spending!!!!
  • A Budget Deficit is when the governments
    expenditures exceeds its revenue.
  • The National Debt is the accumulation of all the
    budget deficits over time.
  • If the Government increases spending without
    increasing taxes they will increase the annual
    deficit and the national debt.
  • Most economists agree that budget deficits are a
    necessary evil because forcing a balanced budget
    would not allow Congress to stimulate the
    economy.

7
Paul Solomon Video Deficit and Debt
US Debt Clock
8
Explain this cartoon
2003
9
Who ultimately pays for excessive government
spending?
10
VideoGovernment Stages Coup
10
11
11
12
12
13
Additional Problems with Fiscal Policy
  • Problems of Timing
  • Recognition Lag- Congress must react to economic
    indicators before its too late
  • Administrative Lag- Congress takes time to pass
    legislation
  • Operational Lag- Spending/planning takes time to
    organize and execute ( changing taxing is
    quicker)
  • Politically Motivated Policies
  • Politicians may use economically inappropriate
    policies to get reelected.
  • Ex A senator promises more welfare and public
    works programs when there is already an
    inflationary gap.

14
Additional Problems with Fiscal Policy
  • 3. Crowding-Out Effect
  • In basketball, what is Boxing Out?
  • Government spending might cause unintended
    effects that weaken the impact of the policy.
  • Example
  • We have a recessionary gap
  • Government creates new public library. (AD
    increases)
  • Now but consumer spend less on books (AD
    decreases)
  • Another Example
  • The government increases spending but must borrow
    the money (AD increases)
  • This increases the price for money (the interest
    rate).
  • Interest rates rise so Investment to fall. (AD
    decrease)
  • The government crowds out consumers and/or
    investors

15
Additional Problems with Fiscal Policy
  • 4. Net Export Effect
  • International trade reduces the effectiveness of
    fiscal policies.
  • Example
  • We have a recessionary gap so the government
    spends to increase AD.
  • The increase in AD causes an increase in price
    level and interest rates.
  • U.S. goods are now more expensive and the US
    dollar appreciates
  • Foreign countries buy less. (Exports fall)
  • Net Exports (Exports-Imports) falls, decreasing
    AD.

16
Explain this cartoon
16
17
Activity
17
18
Congressional Committees
  • As a group, analyze the situation, identify the
    problem, and identify your solution

The Good, the Bad, and the Ugly
19
1.) 1933
  • Situation
  • GDP fell -1.2
  • Inflation rate -.5
  • Unemployment Rate25
  • Your Solution
  • What actually happened
  • FDR increased public works via the New Deal
    programs.

20
2.) 1944
  • Situation
  • GDP grew 8
  • Inflation rate 3.7
  • Unemployment Rate1.2
  • Your Solution
  • What actually happened
  • War ended the next year and government orders for
    war materials decreased.
  • Many public works programs were discontinued

21
3.) 1980
  • Situation
  • GDP fell -0.3
  • Inflation rate 13.5
  • Unemployment Rate7.1
  • Your Solution
  • What actually happened
  • The next year, President Regan and congress
    lowered taxes on individuals and corporations by
    about 30. (Supply-side Economics)

22
4.) 2003
  • Situation
  • GDP fell 0.5
  • Inflation rate 1.5
  • Unemployment Rate12.0
  • Your Solution
  • What actually happened
  • Congress voted to give tax cuts to citizens.
    (Bush Tax Cuts)
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