AP Fiscal Policy.notebook. January 14, Warm Up:

Transcription

1 Warm Up: Assume that a short-term stagflationary situation occurs in the economy. How will the economy selfadjust back to long run equilibrium? The Key to the Self Adjusting Model: Nominal Wages will adjust During Recessionary Gap: Nominal Wages Fall During Inflationary Gap: Nominal Wages Rise This will shift SRAS back to long run equilibrium. Feb 23 4:35 AM Feb 23 4:23 AM Read the excerpts of the speeches from Hoover and Roosevelt. Be ready to contrast their viewpoints and relate them to our economic ideologies that we have been discussing. Annual Message to Congress on the State of the Union, December 1930, by Herbert Hoover "Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body the producers and consumers themselves. Recovery can be expedited (speeded up) and its effects mitigated (eased) by cooperative action. That cooperation requires that every individual should...maintain his self reliance; that each and every one should search for methods of improving his business or service...that each should seek to assist his neighbors who may be less fortunate; that each industry should assist its own employees; that each community and each State should assume its full responsibilities for organization of employment and relief of distress..." Feb 22 9:06 PM Feb 10 10:06 AM Presidential Nomination Address, 1932, by Franklin Delano Roosevelt Where were Roosevelt's ideas coming from? "When not if we get the chance, the Federal Government will assume bold leadership in distress relief. For years Washington has alternated between putting its head in the sand and saying there is no large number of destitute people in our midst who need food and clothing, and then saying the States should take care of them, if there are. Instead of planning two and a half years ago, they kept putting it off from day to day, week to week, and month to month, until the conscience of America demanded action. I say that while primary responsibility for relief rests with localities now, as ever, yet the Federal Government has always had and still has a continuing responsibility for the broader public welfare." Feb 10 10:06 AM Feb 10 10:06 AM 1

2 AP Fiscal Policy.notebook Fiscal Policy: How does the Government stabilize the economy? the use of government spending and revenue collection to influence the economy Fiscal Policy - actions by Congress to stabilize the economy Monetary Policy- actions by the Federal Reserve Bank to stabilize the economy Feb 6 11:02 AM Feb 10 12:48 PM Two Categories of Fiscal Policy Discretionary Fiscal Policy - Congress creates a new bill that is designed to change through government spending or taxation. Two Types of Fiscal Policy: Expansionary Non-Discretionary Fiscal Policy - Automatic Stabilizers that are PERMANENT spending or taxation laws that work to counter the business cycle (unemployment benefits, etc.) Contractionary Feb 6 11:08 AM Feb 6 3:41 PM Contractionary Fiscal Policy Expansionary Fiscal Policy Goal Close a recessionary gap AS Actions: Goal: Close an inflationary gap Actions: AS 1 Impact: Unemployment -Price Level Y1 Impact: - -Unemployment Price Level 1 Yfe Y1 Yfe Feb 23 4:38 PM Feb 23 4:42 PM 2

3 AP Fiscal Policy.notebook Closing: How is fiscal policy demonstrated in the cartoon? How is fiscal policy being applied? What is the cartoonist's opinion of the policy? What makes you say so? Feb 23 4:39 AM Feb 6 3:44 PM Warm Up: Brainstorm: Why do people want the Superbowl in their stadiums? 1. Congress receives word that economists feel a deep recession is coming. a) What are the actions Congress is able to take? b) Show the intended impact of these policies using the long-run AS/ model. c) Using the SRPC model, show how these actions may create some level of concern in the economy. Example: Raveen spends $100 on Michaela's product. Michaela now has more income and spends $100 on Olivia's product. Olivia now has more income and spends $100 on Devan's product. By how much did consumer spending increase? Feb 6 3:46 PM The Multiplier Effect Feb 6 3:52 PM SRAS an initial change in spending will set off a spending chain 2) What can government do to that is magnified in the economy fix it? $400 $500 FE (billions) Feb 6 3:53 PM 1)What kind of gap is this? 3) Should they spend $100 billion to fix this gap? Feb 8 9:10 PM 3

4 The Effect of Government Spending If government spends $10 billion, will increase by $10 billion? How much will it increase by? What is this dependent upon? Marginal Propensity to Consume - How much will people consume rather than save when there is additional income? -Always expressed as a decimal or fraction. MPC = Change in Consumption Change in Income Feb 8 9:16 PM Feb 8 9:18 PM MPC = Change in Consumption Change in Income Practice: 1. You receive $100 and spend $ You receive $100 and spend $ Your receive $100 and spend $100. Marginal Propensity to Save - How much will people save rather than consume when there is a change in income? -Also always expressed as a fraction or decimal. MPS = Change in Savings Change in Income Feb 8 9:21 PM Feb 8 9:23 PM Practice: MPS = Change in Savings Change in Income 1. You receive $100 and save $ You receive $100 and your MPC is.7. What is your MPS? MPS = 1-MPC Why is this true? Feb 8 9:25 PM Feb 8 9:27 PM 4

5 How is spending multiplied? Assume the MPC =.5 for everyone So... The SuperBowl comes to Atlanta and there is an increase in $100 in Madison's restaurant profits. Madison saves $50 and spends $50 in Katy's clothing store. Katy now has $50 more income. Total Change in GDP Multiplier Initial Change in Spending Katy saves $25 and spends $25 at Josh's fruit stand. This continues until every penny is saved or spent. Feb 8 9:29 PM Feb 8 9:34 PM The Spending Multiplier Calculating the Spending Multiplier 1 MPS or 1 1 MPC Practice: The MPC is.5. What is the multiplier? Spending Multiplier Practice 1. If MPC is.9, what is the multiplier? 2. If MPC is.8, what is the multiplier? 3. If MPC is.5, and consumption increased $2 million, how much will GDP increase? 4. If MPC is 0 and consumption increased $2 million, how much will GDP increase? Feb 8 9:37 PM Feb 8 9:41 PM Fiscal Policy Practice Draw a Conclusion: How does the effectiveness of fiscal policy change as the MPC falls? SRAS Congress uses discretionary fiscal policy to manipulate the economy. MPC =.8 1. What type of gap? 2. Contractionary or expansionary needed? $500 $1000 FE (billions) 3. What are the two options to fix the gap? 4. How much initial government spending is needed to close the gap? Feb 8 9:44 PM Feb 8 9:45 PM 5

6 SRAS Congress uses discretionary fiscal policy to influence the economy. MPC =.5 1. What type of gap? How does it work with changing tax rates? Changing tax rates has less of an impact than changing government spending. Why? 2. Expansionary or contractionary needed? 3. What are the two options to fix the gap? 4. How much is needed to close the gap? In an economy, the MPC is.75, so the multiplier is 4. If government spends $4 million, GDP increases $16 million. $80 FE $100 (billions) If Congress cuts taxes by $4 million...what will people do? SAVE $1 million!!! GDP increases by $12 million!!! Feb 8 9:51 PM Feb 8 9:55 PM The TAX Multiplier 1 MPC X MPS or MPC MPS SRAS Congress uses discretionary fiscal policy to fix this economy. MPC =.5 1. What options does the government have? If MPC =.75, how much is the tax multiplier? 2. By how much should they change spending? Change in GDP = Tax Multiplier X Initial Change in Taxes $80 $100 FE (billions) 3. By how much should they change taxes? Feb 8 10:01 PM Feb 8 10:05 PM So...Keynes thinks the government should play role in the economy, basing his ideas on: C + I + G + NX = = GDP Warm Up: Assume that the US is facing a recessionary gap. In order to correct it, the government decides to spend $4.3 trillion that year. Tax revenues for the year are $3.3 trillion. What is the problem here? Feb 10 12:46 PM Mar 4 7:23 AM 6

7 AP Fiscal Policy.notebook Criticisms of Fiscal Policy Debt/Deficit Crowding Out Lags Leakages Mar 4 7:24 AM Mar 4 7:55 AM Criticisms of Keynesian Economics Mar 4 7:54 AM Deck the Halls with Macro Follies Feb 10 4:40 PM Closing: Write a MAIN IDEA sentence summarizing the significance of fiscal policy. Feb 15 8:23 AM Feb 10 4:27 PM 7

8 Feb 22 1:12 PM 8