Government & Government & Economics Economics

Review your monetary policy notes!!Review your monetary policy notes!!Draw and label this Business Cycle in your Draw and label this Business Cycle in your note book!! note book!! (Expansion, Contraction, Peak, Trought, Trendline)(Expansion, Contraction, Peak, Trought, Trendline)

Monetary PolicyMonetary Policy The FED’s use of interest rates to The FED’s use of interest rates to

EXPAND or CONTRACT the money EXPAND or CONTRACT the money supply, influencing the economysupply, influencing the economy Place a Place a A A on the Business Cycle where the on the Business Cycle where the

FEDS would raise interest rates to help a FEDS would raise interest rates to help a economy that is heating up. economy that is heating up.

Place aPlace a B B on the Business Cycle where the on the Business Cycle where the FED would lower Reserve Requirement to FED would lower Reserve Requirement to jump start the economy. jump start the economy.

Place a Place a CC where you think we are now. where you think we are now.

Fiscal PolicyFiscal Policy

FISCAL POLICYFISCAL POLICY: : the Federal the Federal GOVERNMENT TAXING & SPENDINGGOVERNMENT TAXING & SPENDING program annually as part of the budgetprogram annually as part of the budget ((toolstools: taxes & spending programs): taxes & spending programs)

GDP = C + I + GGDP = C + I + G

When consumers & businesses are not spending GDP will suffer

Government must step up and spend money to encourage “C & I” to do the same.

FED and Federal Government can FED and Federal Government can work together to help economy:work together to help economy:

INJECTIONSINJECTIONS Put money into Put money into

circulation in times of circulation in times of recessionrecession

Federal GovernmentFederal Government::

(1)(1) Lower TaxesLower Taxes

(2)(2) Increase Gov’t spending Increase Gov’t spending programs (to help programs (to help people – Bail Outs, people – Bail Outs, subsidies, more social subsidies, more social welfare)welfare)

LEAKAGESLEAKAGES Get money out of Get money out of

circulation in times of circulation in times of inflationinflation

Federal GovernmentFederal Government(1)(1) Raise TaxesRaise Taxes(2)(2) Decrease Gov’t Decrease Gov’t

spending programsspending programs

Warm UpWarm Up::GDP = C + I + GGDP = C + I + GWhen assisting the economy, should When assisting the economy, should the government help the consumers or the government help the consumers or the producers? Explain.the producers? Explain.

Fiscal Policies & PoliticsFiscal Policies & Politics

1)1) Demand-Side EconomicsDemand-Side Economics (a.k.a. (a.k.a. Keynesian Economics)Keynesian Economics)

*Named after early 20*Named after early 20thth century century economics John Maynard economics John Maynard Keynes (an FDR advisor)Keynes (an FDR advisor)

**Government actions to help Government actions to help economy by economy by loweringlowering unemployment and unemployment and stimulatingstimulating demanddemand

PEOPLE

↑$↑

BUSINESS

Fiscal Policies & PoliticsFiscal Policies & PoliticsGovernment does this through:Government does this through:

Transfer PaymentsTransfer Payments: a payment : a payment govt govt givesgives to citizens for which it receives to citizens for which it receives nothing in return (nothing in return (transfer moneytransfer money))

Ex) Social Security, Welfare, Medicaid, Ex) Social Security, Welfare, Medicaid, FoodStamps/WICFoodStamps/WIC

President FDRPresident FDR used this theory used this theory with his New Deal’s with his New Deal’s PRIMING THE PUMPPRIMING THE PUMP!!!!

Warm UpWarm Up::

Why do legislators support demand-Why do legislators support demand-side economic policies?side economic policies?

2) 2) Supply-Side EconomicsSupply-Side Economics

**Policies designed to stimulate Policies designed to stimulate outputoutput and lower unemployment and lower unemployment by increasing by increasing productionproduction rather rather than demandthan demand

BUSINESS

↓$↓

PEOPLE

Government can do this through:Government can do this through:PrivatizationPrivatization:: the providing of public the providing of public

goods is turned over to goods is turned over to private, profit-private, profit-making firmsmaking firms

Ex) BFI Garbage rather than Town Ex) BFI Garbage rather than Town Highway Dept.Highway Dept.

President Hoover’s TRICKLE-DOWNPresident Hoover’s TRICKLE-DOWN and Reaganomics followed this and Reaganomics followed this theory.theory.

Which Side to Help?Which Side to Help?The Circular Flow of Economic Activity

BUY G&S

BUY LLC

Supply-Side:give money to businesses

(Republican)

Demand-Side:give money to consumers

(Democratic)

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