Managing the Business Cycle Reading Check: Pages

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1 E&F/Raffel Please complete the table below Managing the Business Cycle Reading Check: Pages Expansionary Fiscal Policy Contractionary Fiscal Policy Impact on Aggregate Demand Examples: When would government pursue the About the Multiplier Effect Sometimes, changes in spending cause a chain reaction that results in a ripple or multiplier effect throughout the entire economy. A change in spending (either up or down) by one economic unit (business, consumer or government) affects the income of a second unit. The second unit responds by changing spending, which, in turn affects the income of a third unit. Example: 1. Mr. Jones loses his job during the recession (so, loss of income-no salary) 2. Since Mr. Jones is unemployed, he tries to save money by firing the woman who cleans his house (cut in Mr. Jones spending leads to a loss of income/salary for the cleaning woman). 3. The cleaning woman now also has a loss of income, so she cuts back her spending, leading to lower income for someone else in the economy. 4. Process continues throughout the entire economy. When Mr. Jones lost his job, it triggered a multiplier effect as lower spending rippled across the economy. The cumulative result is many times larger than the initial change. In a recession, when GDP falls, governments often try to increase aggregate demand through increased government spending and/or tax cuts (tax cuts increase consumption spending). Just as one decision by a consumer to cut spending leads to a loss of income throughout the economy, a decision to increase government spending or cut taxes will increase income throughout the economy. The impact increased income and spending will be greater than the amount of money spent or taxes cut.

2 Task: We are going to act out the multiplier effect as part of a three-act skit. Each person in the class will receive a part. Your task is to write several lines of dialogue that illustrates how you respond to the multiplier effect. You must read the information about the character before you in the chain before you write your dialogue. For example: I am Renee Robideau. I owned my own catering business. Unfortunately, because of the recession, people stopped spending money on fancy weddings and parties, so I went bankrupt. Since I am now unemployed and looking for work, I cannot even think of buying the new Ford Minivan I really need. I cancelled my order with the local dealer this morning. In this instance, Renee s income is down because. In this instance, Renee decides to cut back her spending by Your dialogue should reflect the character s changing income and spending given the setting of the play The dialogue for the next character, (Willie Robinson, the Ford dealer), needs to identify how Renee Robideau s actions have impacted his business and how he will respond (income/spending). ACT I: Location: Anytown U.S.A. Time: The present Characters: Narrator: Opens Act I of the skit by warning of an economic chain of events that is about to occur, introduces Renee Robideau, and (at the end of the Act), explains what has happened. Renee Robideau, the chef and owner of a catering business (who cancels her order for a new Ford minivan because her business goes bankrupt and closes) (done in the example) 1. Willie Robinson, a salesman at the Ford dealership (who is planning to buy a new wardrobe of shirts, suits, and ties) 2. Sam Goldstein, the owner of Goldstein s Menswear (who wants to have his house painted) 3. Philip Youngblood, a housepainter (who is looking for a new TV) 4. Bob Chau, the owner of the local TV sales and repair shop (who has been planning a trip to Europe)

3 5. Brittany Spears, a travel agent (who has an outstanding loan from the local bank) 6. Nicki Manaj, the local banker 7. Juanita Lopez, the owner and operator of the Acapulco Restaurant (who has applied for a bank loan to build a new dining room) 8. Bob Miller, a building contractor Synopsis: An unexpected sharp drop in spending by one of the characters reverberates through the economy of a town as the loss of income from each character s spending results in less income and still less spending by every other character. Write the dialogue for your character here: ACT II: Location: The same as Act I Time: Several months later Characters: Narrator: Opens Act II by telling of an economic chain reaction that is about to occur, introduces Uncle Sam Spender, and (at the end of the Act) explains what has happened. New Event: Uncle Sam Spender, the local agent for a government agency places a new order for five Ford sedans for his agency s use. 9. Willie Robinson, a salesman at the Ford dealership (who is planning to buy a new wardrobe of shirts, suits, and ties) 10. Sam Goldstein, the owner of Goldstein s Menswear (who wants to have his house painted) 11. Philip Youngblood, a housepainter (who is looking for a new TV)

4 12. Bob Chau, the owner of the local TV sales and repair shop (who has been planning a trip to Europe) 13. Brittany Spears, a travel agent (who has an outstanding loan from the local bank) 14. Nicki Manaj, the local banker 15. Juanita Lopez, the owner and operator of Acapulco s Restaurant (who has applied for a bank loan to build a new dining room) 16. Bob Miller, a building contractor Synopsis: Uncle Sam Spender, the representative of a United States government agency, announces that Congress has authorized an increase in government spending, which allows him to make a big purchase from one of the businesses in town. The effects ripple through the town s economy. Write the dialogue for your character here: ACT III: Location: The same Time: About the same Characters: Narrator: Opens Act III by telling of another economic chain reaction that is about to occur in Anytown, introduces Aunt Iris Goody, and (at the end) closes the skit. New Event: Aunt I.R.S. (Iris) Goody, the local Congressional Representative who announces a 10% tax cut for all residents of Anytown. 17. Willie Robinson, a salesman at the Ford dealership (who is planning to buy a new wardrobe of shirts, suits, and ties) 18. Sam Goldstein, the owner of Goldstein s Menswear (who wants to have his house painted) 19. Philip Youngblood, a housepainter (who is looking for a new TV)

5 20. Bob Chau, the owner of the local TV sales and repair shop (who has been planning a trip to Europe) 21. Brittany Spears, a travel agent (who has an outstanding loan from the local bank) 22. Nicki Manaj, the local banker 23. Juanita Lopez, the owner and operator of Acapulco s Restaurant (who has applied for a bank loan to build a new dining room) 24. Bob Miller, a building contractor Synopsis: Aunt I.R.S. (Iris) Goody announces that a tax cut by Congress will result in each resident s aftertax income increasing by 10%. The windfall gain has quite an effect on the economy of Anytown, Write the dialogue for your character here:

6 Explain how the following conditions can limit the effectiveness of fiscal policy (page 544): Mandatory Spending: Inside Lags: Outside Lags: