Economics Unit Four. Macroeconomics

Transcription

1 Economics Unit Four Macroeconomics

2 Opener: Wednesday, February 3 rd We are living in exponential times! Shift Happens 2009 Did You Know? (2012) Did You Know 2028?

3 Learning Objectives SSEMA1 The student will illustrate the means by which economic activity is measured SSEMA2 The student will explain the role and functions of the Federal Reserve System. SSEMA3 The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth

4 Key Terms Macroeconomics Aggregate Demand Aggregate Supply Arbitration Boycott Business Cycle Central Bank Consumer Price Index Current Dollars Cyclical Unemployment Deflation Depression Discretionary Spending Distribution of Income FDIC Federal Budget Federal Reserve System FICA Fiscal Policy Frictional Unemployment Glass Ceiling Government Deficit Great Depression Grievance Procedure Gross Domestic Product Inflation Injunction Internal Revenue Service (IRS) Labor Force Unskilled Labor Semiskilled Labor Skilled Labor Professional Labor Labor Union Craft Union Trade Union Industrial Union Company Union Independent Union Mandatory Spending Mediation Monetary Policy Monetary Standard Money National Debt Net National Income Peak Per Capita Personal Income Pickett Private Sector Progressive Tax Proportional Tax Public Sector Real or Constant Dollars Recession Regressive Tax Reserve Requirement Stagflation Standard Of Living Strike Structural Unemployment Taxation Sin Tax Tax loophole Individual Income Tax Sales tax Trough Unemployment Wage Rate

5 Today s Learning Standard Measuring Economic Activity The student will illustrate the means by which economic activity is measured Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand. Explain how economic growth, inflation, and unemployment are calculated. Identify structural, cyclical, and frictional unemployment Define the stages of the business cycle, as well as recession and depression.

6 Macroeconomics Just like the field of microeconomics teaches us specific things within the market economy, macroeconomics gives us a overall view of economic activity Macroeconomics is the study of the whole economy together the aggregated spending, saving, and investing decisions of all consumers and businesses These factors together households, businesses, government, and net exports describe the health of the economy as a whole!

7 Key Economic Indicators The health of the economy and the big picture of economics is measured in several ways These include: Gross Domestic Product (GDP) The Consumer Price Index (CPI) This is a measure of the rate of inflation Unemployment

8 Gross Domestic Product (GDP) To compare our system with other countries systems, and to compare the strength of our own economy year to year, economists use something called the Gross Domestic Product (or GDP), which is the total dollar value of all final goods and services produced within a country during one calendar year.

9 Gross Domestic Product (GDP) GDP is measured by assessing the total expenditures (spending) of four different economic sectors: 1. Consumers (C) Consumer Spending 2. Government (G) Government Spending 3. Investment (I) Investments from Industry 4. Net Exports (NX) Exports Minus Imports

10 Gross Domestic Product

11 Famous Economic Formula GDP= C+G +I+(X-M) C= Personal consumption expenditures (consumer spending). Includes durable goods: a lifetime of more than one year, and non-durable goods: a lifetime of less than one year, and services.

12 G = Government Purchases The dollar amount that federal, state, and local governments spend on items IE: highways, education, defense, etc.

13 I = Gross Capital Investment Total value of all capital goods produced in a given nation during one year. Fixed investment: Buildings, machinery, equipment Inventory investment: raw materials, intermediate goods, final goods

14 The Net Exports (NM/NX) Sector The reason we subtract our imports from our exports is this: Exports - The money other countries spend on our exports adds value to our economy Imports - The money we spend on goods imported from other countries takes money out of our economy So, the foreign sector s expenditure is calculated only when the transactions add value to our economy!

15 How Economists Calculate the GDP: Which of these would be counted in the GDP? A. A tree cut by a woodcutter who sells it to a lumber yard. B. The lumber bought by the lumber yard who then sells it to a furniture manufacturer. C. A table made by the manufacturer now sold to a couple in Detroit, Michigan. The answer is C

16 How Economists Calculate the GDP: They use only products produced in the current year. This would exclude things bought at yard sales. Which of the following was used in the calculation of the GDP in 1999? A. A car manufactured in 1998 but sold in B. A used 1993 Toyota that was sold to Ms. Simpson in Memphis in C. A Ford F150 produced in 1999 but sold in The answer is C again!

17 How Economists Calculate the GDP: They use only items produced within national borders. Would this include or exclude Coca-Cola (a U.S. company) produced at a plant in Russia? Exclude GDP: Is a measure of the strength of our economy

18 Analyzing GDP What Does it Mean?!? If the nation s GDP increases over time, you can tell that the economy is growing! That s a good thing!! To get an accurate measurement, the calculation depends on two more factors: Real GDP: the GDP of a nation adjusted for inflation Nominal GDP: the GDP of a nation before accounting for inflation So, a nation s rate of growth is the percentage change in its real GDP over time

19 So, How Do We Adjust for Inflation? Inflation is the gradual increase in prices over time This is just a fact of life - goods and services in the future will never again cost what they did in 1920! - so, deal with it! However, when prices increase, we may be spending more money without actually buying more goods and services So, to judge the growth of the economy (GDP), we have to make sure that people are actually buying more, not just spending more

20 Real vs. Nominal GDP To adjust GDP for price increases economists calculate both NOMINAL GDP: the current GDP expressed in current prices REAL GDP: which is adjusted for price increases-inflation

21 GDP Measures Economic Growth or Decline Changes in Real GDP helps to determine if the economy has increased or decreased its actual production of new products

22 Limitations of GDP Non-market activities: GDP does not include goods and services that people make or do themselves i.e. baby-sitting, mowing the lawn, cooking dinner, washing cars Underground economies: production and income not reported to the government i.e. black market products: illegal drugs, weapons, stolen goods, exotic pets

23 Limitations of GDP Negative Externalities: unintended economic side effects, or externalities that have monetary value not reflected in the GDP Quality of Life: Some things that improve well-being cannot be included in GDP i.e. pleasant surroundings, ample leisure time, personal safety

24 GDP does NOT include: value of used products value of volunteer work purely financial transactions value of intermediary goods Transfer of assets

25 GNP Gross National Product: annual income earned by U.S. owned firms and U.S. citizens Market value of all goods produced by Americans all over the world in one year

26 Checkpoint Questions Services such as mowing the lawn or a doctor s visit, fall under consumption expenditures as a: a. Durable good b. Fixed investment c. Non-durable good d. Inventory investment At the end of the year, a bike manufacturing firm finds that its inventories of bikes are $15,000 above the amounts of its inventories last year. Where would this be counted in the GDP? a. Consumption b. Investment c. Net exports d. Government purchases

27 Questions for Reflection What is the difference between intermediate goods and final goods? How does Gross Domestic Product (GDP) differ from Gross National Product (GNP) How does nominal GDP differ from real GDP?

28 Opener: Thursday, February 4 th Economics in the news! Macroeconomics is economics on a national and global scale. The information you get on news via TV, radio, newspaper and Internet is primarily national and global news which often includes information on economic health. So you re being informed about macroeconomics! Take a page out of a Wall Street Journal and find an article which sounds interesting to you. Read the whole article like an economist! Underline anything that might affect supply or demand on a macro-basis.

29 Economics in the News After reading and underlining all you economic information On a clean sheet of paper write your heading and your writing prompt down. Then answer your writing prompt in 4-6 complete sentences. Writing Prompt Summarize your article and include details which affect aggregate supply and demand. Include details which give us a clearer understanding of economic health of a country, region or the world.

30 Focus #1 Measuring Economic Activity The student will illustrate the means by which economic activity is measured Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand. Explain how economic growth, inflation, and unemployment are calculated. Identify structural, cyclical, and frictional unemployment Define the stages of the business cycle, as well as recession and depression.

31 What did we learn yesterday? GDP is the total dollar value of all final goods and services produced within a country during one calendar year. Formula GDP = C + G + I + NX Two Kinds Nominal and Real Inflation Effect GDP - Fed Reserve of St. Louis

32 Consumer Price Index The Consumer Price Index (CPI) is a measure of the change in prices in an economy Economists add up the total price of a market basket of typical items bought by the average family in a month Then, they compare the total price of these goods to the total price of the same items during a base period (or previous year) by dividing the total by the base Then, they multiply the result by 100 to have an index figure for comparison purposes CPI = cost of today s market basket cost of a market basket in previous time X 100

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34 Let s Look at an Example Let s say that in 2006, a year that we would like to serve as our base year, the market basket cost $960 Then, we measure the same goods again in 2007 and find that they cost $1000 So, it works out like this: CPI = CPI = 1.04 X 100 CPI = 104 X 100 Remember, this number is an index figure. By itself, it doesn t tell us much. We compare it to 100 (the base number integer that is always used) to figure out the percentage change!

35 Calculating Percentage Change So, when we compare to our base integer of 100, we see that there has been a 4% increase in prices: CPI Index from calculation Base CPI integer that is always used We end up with 4/100, or 4% If in this same year, GDP rose by only 4%, then we know that there was no real growth the change was only due to inflation However, if it grew by more than 4%, then the economy did actually grow!

36 Inflation and Growth On the other hand, if prices increase but the economy does not grow, a condition called stagflation occurs. Stagflation is when there is high inflation, the economic growth rate slows and unemployment remains high.

37 Inflation and Growth High inflation hurts wage earners because the money they make is now worth less Some businesses may offer cost-of-living adjustments for their employees to balance out the effects of inflation

38 Unemployment To again monitor the health of our economy, economists measure the Unemployment Rate. Each month, they survey certain Americans to find out their employment status. The U.S. Government defines employed as people 16 and older meeting one or more of the following criteria.

39 Criteria to be considered Employed 1. Working for pay or profit for 1 or more hours this week. 2. Working without pay in a family business 15 or more hours. 3. Having a job, but being ABSENT due to illness, weather, vacation, etc.

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41 The U.S. Government defines Unemployed" as: 1. NOT meeting any of the criteria above AND 2. ACTIVELY looking for work during the past 4 weeks. The most closely watched and highly publicized labor force statistic is the UNEMPLOYMENT RATE=the percentage of people in the civilian labor force who are UNEMPLOYED.

42 Measuring Unemployment Unemployment rate = unemployed labor force x 100

43 Why is there Unemployment? In the end, unemployment depends on supply and demand the supply of able workers and the demand by businesses for those employees Some, but not all, unemployment is the result of a downturn in the economy a change in supply or demand Economists classify four different types of unemployment

44 4 Types of Unemployment Structural Cyclical Frictional Seasonal

45 STRUCTURAL Unemployment Unemployment that occurs as a result of changes in technology, consumer preferences, or in the way the economy is STRUCTURED. EX: Many TV repairmen had to find new work as televisions are now built with transistors instead of tubes.

46 CYCLICAL Unemployment This unemployment results from contractions in the economy. This type of unemployment HARMS the economy more than any other types of unemployment. During the Great Depression, the unemployment rate reached an all time high of about 25%. As recently as 2009 and 2010, the unemployment rate reached 10.2%.

47 FRICTIONAL Unemployment People who have decided to leave one job and LOOK for another typically better job. Also, new entrants and re-entrants into the LABOR FORCE. Economists consider frictional unemployment as a NORMAL part of a healthy and changing ECONOMY.

48 SEASONAL Unemployment This predictable unemployment fluctuates as a result of HOLIDAYS, school breaks, and industry PRODUCTION schedules.

49 The Business Cycle Unemployment is more severe when the economy goes through a downturn Economies go through a cycle of good times and bad times alternating periods of growth (upturns) and recession (downturns) This is called the Business Cycle

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51 Changes on the Business Cycle As Aggregate Supply and Aggregate Demand change, consumers and producers notice the effects of either rising or falling prices in the economy Keep in mind, there is a ripple effect as consumers see higher prices, they buy less, so producers produce less, so they lay off workers (so, then people spend even less or business try to save money and lower costs..) Do you see where this is going? The reason this happens is because everything in the economy is CONNECTED!!!!!!!

52 So, What Causes a Recession? Economic downturns occur when there is some kind of shock to the economic system This could be a natural disaster, a war, a sudden rise in taxes or interest rates, etc This causes AD to shift left (decrease!), which begins a downturn in the economy! In a smaller market, producers would just try lowering their prices but, remember, Aggregate Supply doesn t respond as quickly! When this occurs for 6 months or more, economists say we are experiencing a recession It will last until producers can lower prices and demand as well as production start to rise again!

53 Recovery and Depression When the economy starts to pick up again, economists call this a recovery It is the first sign of an upturn after a long period of decline If the economy experiences a recession that lasts a long time or has a severe decrease in GDP, economists say we are experiencing a depression A depression usually involves extreme levels of unemployment, severe decrease in Aggregate Demand, and a drastic decrease in production

54 Business Cycle Fluctuations

55 Checkpoint Questions A recession is when: a. Unemployment decreases b. Real GDP is increasing c. The economy is in a contraction for at least 6 months d. Interest rates and prices are on the increase Which price index is the broadest measure of price changes in our economy? a. Consumer Price Index b. Producer Price Index c. The implicit price deflator d. Industrial Averages Index

56 Questions for Reflection What is the difference between intermediate goods and final goods? How does Gross Domestic Product (GDP) differ from Gross National Product (GNP) How does nominal GDP differ from real GDP?

57 Opener: Friday, February 5 th Crash Course - Macroeconomics

58 What Have We Learned So Far? GDP Definition Formula CPI Inflation Unemployment 4 Types Business Cycle

59 Today s Learning Standard SSEMA1 The student will illustrate the means by which economic activity is measured Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand. Explain how economic growth, inflation, and unemployment are calculated. Identify structural, cyclical, and frictional unemployment Define the stages of the business cycle, as well as recession and depression. Describe the difference between the national debt and government deficits

60 Business Cycles Fluctuations in Real GDP are referred to as Business Cycles. The duration and intensity of each phase of the Business Cycle are not always clear. Business Cycles are typical of Market, Capitalistic economies due to the free nature of those economic systems

61 Phases of the Business Cycle Expansion Peak Contraction Trough

62 Expansions Expansions are periods of increasing Real GDP. Unemployment decreases, businesses expand, and Personal Consumption increases. As expansions continue, there tend to be upward pressures on prices (inflation) and interest rates.

63 A Word About Interest Rates The amount of money charged as a fee for lending money. The price of borrowing money. As interest rates rise LESS consumers will borrow money IF they are WILLING and ABLE As interest rates fall MORE consumers will borrow money IF they are WILLING and ABLE

64 Peak A peak is a period when the economy starts to level off. Businesses postpone new investments, and consumer saving tends to increase. Rising prices and interest rates tend to restrict purchases and investments, often leading to a Contraction.

65 Contraction A Contraction is a period of declining Real GDP. Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours. Interest rates and prices level off, and often decline during long contractions.

66 Long Term Contractions Recession: Six months of declining Real GDP Depression: Twelve months of declining Real GDP coupled with at least 15% unemployment.

67 Trough A Trough is the bottom of a Contraction. Lower interest rates and prices bring customers back to markets.

68 % Change in Real GDP Peak Expansion 0% Contraction Trough

69 Factors That Affect the Business Cycle Business Investment: High levels of business investment (capital good increases like machinery and equipment) promote expansion. Low levels of business investment contribute to contraction. Money and credit: When interest rates go up, people borrow less, and less money is circulating in the economy, thus contributing to a contraction. (and vise versa)

70 Factors That Affect the Business Cycle Public Expectations: People will increase their spending if they believe the economy is strong. This helps promote expansion. External Factors: Like energy crisis and war.

71 Economic Indicators Economic Indicators are specific economic activities that have historically been good indications of the general cycle of the economy. There are three types: * Leading * Coincident * Lagging

72 Leading Economic Indicators Economic activities that tend to change 3 to 6 months before the general economy changes. Examples: Stock Market Housing Starts Money Supply Orders for Durable Goods # of new businesses Average workweek Number of building permits issued

73 Coincident Economic Indicators Economic activities that change at about the same time the general economy (GDP) changes. Examples: Personal Income Industrial Production Levels Retail Sales Number of employed nonagricultural workers

74 AD and AS The Business Cycle depends on measures called Aggregate Demand (AD) and Aggregate Supply (AS) AD is the total amount of goods and services that all of the consumers in an economy are willing to buy AS is the total amount of goods and services that all producers in an economy are willing and able to make These interact much like supply and demand in a small market laws still apply! Except, we watch what happens to GDP (growth or decline), not price!

75 Interaction of AS and AD Increase in Aggregate Supply (AS ) Supply increases Price decreases Upturn in economy Notice the change in GDP

76 Interaction of AS and AD Decrease in Aggregate Supply Supply decreases Demand increases Downturn in economy Notice the change in GDP

77 Interaction of AS and AD Increase in Aggregate Demand Increase in demand Increase in price Upturn in economy Notice the change in GDP

78 Interaction of AS and AD Decrease in Aggregate Demand Decrease in demand Decrease in price Downturn in economy Notice the change in GDP

79 Interaction of AS and AD Notice the change in GDP in each graph! GDP Goes Down B & D GDP Goes Up A & C

80 Aggregate Supply AS is a little more complicated than simple supply in the market AS takes longer to respond to changes in demand, and thus, it takes longer for the prices of all goods and services to change So, economists often use two different curves to show AS: a short-run aggregate supply curve and a long-run aggregate supply curve In the short-run, AS responds to changes in demand, in the long-run AS is limited by the natural scarcity of an economy s resources

81 Focus #1 Check Point The government begins funding training programs to teach computer repair and website design to unemployed adults. Which kind of unemployment would such training help MOST? a. Frictional b. Seasonal If aggregate demand and real GDP are beginning to fall and the unemployment rate is beginning to rise, what conclusion can you draw? a. The economy is in an expansion phase b. The economy is facing a downturn c. Structural d. Cyclical c. The economy is in a recovery d. Aggregate supply is increasing

82 Balance of Class Unit 3 Test If you made a C or lower, you can do test corrections to earn back ½ of your points! When you re given your papers: 1. Write down the question number you re correcting 2. Write the question 3. Write the correct answer Shark Tank Economics If you made an A or a B on your test congratulations! You can enjoy an episode of Shark Tank and analyze what happens to the entrepreneur and their proposal. Turn your Shark Tank paper in with your Unit Papers for credit. Make sure to turn all your papers in before you leave class.

83 Opener: Monday, February 8 th Crash Course - Business Cycle

84 Focus #2 Monetary Policy The student will explain the role and functions of the Federal Reserve System. Describe the organization of the Federal Reserve System Define monetary policy Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic growth.

85 Money, Money, Money! As you have learned, the economy operates around money Before 1913, hundreds of national banks could print as much paper money as they wanted, as often as they wanted! They could also loan out money when times were good, or refuse to loan money when times were bad These practices made huge profits for bankers, but greatly hurt the economy as a whole! So, the government created a solution

86 The Federal Reserve System A special bank, referred to as The Federal Reserve ( the Fed ), was established in 1913 to help control the money supply (or, the amount of money) in the economy These tasks are called monetary policy or, the regulation of the amount of money available in the economy The Fed does this in order to promote economic growth and full employment to limit the impact of inflation and recessions These are called the goals of monetary policy!

87 Other Fed Responsibilities Another huge task that the Fed is responsible for is controlling what the banks can and cannot do They do this to make sure that banks are all playing by the same rules! The most important job is to tell the banks how much of their money must be held in the form of reserves Reserves are money that the bank must keep in its vault instead of loaning out for a profit! Why do you think it s important for banks to hold some money as reserves?

88 Structure of the Fed The Fed is often discussed as the nation s central bank but, it is actually a system The Federal Reserve System is made up of 12 different banks in various regions of the nation Each of these banks is able to print paper money, called Federal Reserve Notes The system as a whole is run by a Board of Governors, who are appointed by the U.S. President The Chairman of the Federal Reserve is Janet Yellen The monetary policy of the Fed is decided and enforced by the Federal Open Market Committee (FOMC)

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92 Tools of Monetary Policy The FOMC regulates the money supply by buying and selling securities, or bonds Securities or bonds are documents issued by the government for which you pay a set price now, in exchange for a higher fixed amount (called the face value ) later When securities are bought and sold, this is called an open-market operation A bond usually matures or can be exchanged for its face value in 5, 10, or 20 years

93 Open-Market Operations When the economy is in a recession, the Fed will buy securities itself The money that it pays for these securities then goes into the banking system, and thus, increases the money supply to the public When banks have more money to lend, they lower their interest rates why do you think think? Down the line, the point of the Fed s actions are to encourage economic growth!

94 Buying Bonds Increases money supply Lowers Interest Rates Selling Bonds Decreases money supply Interest Rates Go Up

95 Remember Inflation? Sometimes, though, the problem in the economy is that it s growing too fast This leads to a rapid increase in prices, and could lead to overproduction Then, the Fed will sell bonds to the public, and keep the money they pay for them as reserves in their vaults This lowers the money supply available to the public in order to curb inflation and control production rates (leads to higher interest rates) So, the use of securities is a give and take!

96 One More Task The Fed may also regulate the money supply through the discount rate The discount rate is the interest rate that the Fed charges other banks to lend them money When the discount rate is high, banks don t borrow as much money and they charge higher interest to the public (lower money supply) When the discount rate is low, banks want to borrow more money to make more profit on loans (higher money supply) Remember the money supply is dependent on the final result for the public!!

97 Let s Switch Gears Macroeconomic Theories to Know Pre-1930 S Classical Theory 1930 s Keynesian Theory s Monetarism Theory 1980 s 1990 s Neo-Classical Theory Also called: Supply Side Economics or Reaganomics

98 Classical Theory Associated With: Jean-Baptiste Say ( ) Time Frame Predominant economic theory until 1930 s Description of Theory Assumes highly competitive marketplace with little or no government interaction Assumes natural state of equilibrium at full employment Say s Law: Supply creates its own Demand

99 Keynesian Theory Associated With John Maynard Keynes who wrote The General Theory of Prices and Equilibrium Time Frame 1930 s Description of Theory There is no natural balance in the economy Endorses the use of fiscal policy to influence aggregate demand, which they believe is the primary influence on employment & price levels Fiscal Policy is the use of government taxing and spending authorities to achieve economic goals.

100 Monetary Theory (Monetarism) Associated With Milton Friedman (Nobel Prize) Time Frame 1940 s 1950 s Description of Theory The supply of money in the economy will affect interest rates therefore investment, and consumption. Too much $$ results in inflation; too little in unemployment. Advocated a balance between $$ supply and economic productivity and less gov t involvement

101 Neo-Classical (Supply-Side) Associate With Victor Canto Ronald Reagan Time Frame 1970 s 1990 s Description of Theory Gained prominence during 1970 s Stagflation. Re-focus on Aggregate Supply Advocated: Lower Taxes on business and investors Increased privatization of gov t programs Decreased regulation of business

102 Focus #2 Check Point When the Federal Reserve sells government securities, or bonds, on the open market, what effect does this action have on the economy? a. Increases money supply; increases consumer demand b. Increases money supply; decreases consumer demand c. Decreases money supply; increases consumer demand Why does the Fed require banks to keep a percentage of their funds as reserves? a. To buy bonds b. To balance the budget c. To supply cash withdrawals d. Decreases money supply; decreases consumer demand d. To ensure business investments

103 Questions for Reflection 1. What is monetary policy? 2. What is the discount rate?

104 Opener: Tuesday, February 9 th Crash Course - The Fed and Monetary Policy

105 Learning Standard #3 Fiscal Policy The student will illustrate the means by which economic activity is measured Describe the difference between the national debt and government deficits The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth Define fiscal policy Explain the government s taxing and spending decisions

106 Measuring the Economy Review: What other ways have we discussed that measure economic health? Gross Domestic Product (GDP) Unemployment (Unemployment Rate) Inflation (CPI) Many economists also measure the economy by looking at the government s budget The government s budget is based on how much money it will spend compared to how much money it will take in through taxes What do you think is the goal of the budget?

107 The Deficit and Debt If the government spends more money than it takes in for the year, it is operating under a budget deficit This is more of a prediction the idea that the government will have less money in the end If the government has a deficit, it needs to borrow money to finance the difference this is called the national debt It is all of the money that the government borrows to make up for the extra money it spends!

108 Our National Debt in real time

109 The National Debt Like any borrower, the government must pay interest on its debt Today, a big chunk of the government s tax revenues go towards paying this interest (in other words, taxes go towards paying for money that the government has already spent) Because money is going towards interest instead of goods and services, these payments limit the growth of the nation s GDP Thus, economists look at the deficit and debt to continue measuring our economic health

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111 China Owning USA Who Owes More??

112 Fiscal vs. Monetary Policy

113 Fiscal Policy Like the Fed, the government also tries to carry out actions that aim to promote economic growth and stability However, unlike the Fed, the government can t print money or directly control the money supply (i.e. monetary policy) Instead, the government can change its taxing or spending decisions to try to influence the economy Taxing is directed towards consumers (increase AD) Spending is directed at producers (increase AD)

114 Taxing and Spending For example, if the economy is facing a recession, the government may lower taxes for its citizens Think about it what would be the consumer response to this action? Why? If the economy is facing a recession, the government may also increase its spending and buy goods and services from businesses Again, think about it what would be the production response to this action? Why?

115 Raising Taxes? Raising taxes on consumers is often controversial, but it can sometimes help the economy Like limiting the money supply, raising taxes could encourage consumers to decrease their demand on producers When consumers demand more than producers can make, the result is shortages and an increase in prices So, sometimes, encouraging people to spend less money could be a good thing!

116 A Safe Balance If the government cuts taxes and increases its spending at the same time, this could lead to a budget deficit Government spending does speed up economic growth in the short term, but it also increases the debt When the government has to spend taxes on the debt, it decreases the amount of money available to others and banks end up raising interest rates on loans So, then consumers spend less and AD goes down So, in short regulating the economy through fiscal policy is a complicated, controversial, and sometimes self-defeating process

117 Wrap it Up! Crash Course - Fiscal Policy

118 Focus #3 Check Point If GDP is decreasing and the unemployment rate is increasing, which fiscal policy should the government MOST likely use? If the inflation rate is rising too fast, which fiscal policy would make the MOST sense? a. Increase taxes b. Decrease taxes a. Increase taxes c. Increase spending b. Decrease taxes c. Increase bank reserves d. Decrease bank reserves d. Decrease spending

119 Unit 3 Review & Study Guide When instructed, work within your assigned group to complete your Unit 3 Review and Study Guide.