1.Monetary and Fiscal Policy
Honors Current Issues

2. Classical vs Keynesian Econ
Classical Econ theory
Prices rise we buy less (demand goes down) surpluses prices drop we buy more.
When we buy less, businesses lay off workers less people with jobs less buying recession or depression.
Eventually, businesses drop prices to point where people buystuff businesses make $ - businesses hire more workers workers spend $ - Depression over
3. Classical System,
Government had no role in management of the economy Laissez-faire or do nothing
If the economy faces an inflationary gap (equilibrium at a level higher than full employment), Government must reduce demand by spending less; raise taxes; increase interest rates; reducing welfare
4. Fiscal Policy
How to Spend and Tax Our Money
5. Keynesian Economics: Demand Side Economics
John Maynard Keynes (early 1900s)
Economies are unstable and always changing
Inflation caused by DEMAND Too many $ trying to buy too few goods
Economies will NOT balance themselves out in a timely manner
Too many people will get hurt waiting for the economy to adjust to imbalance in Supply & Demand
Government must step in to correct the inherent instability of the economy
6. Fiscal Policy (Keynes view)
In a recession (not enough spending) Government must increase demand by spending more; lowering taxes; lowering interest rates; increasing welfare
Examples:FDRs New Deal programs,Bush/ObamasStimulus Package
Deficit Spending is good
When in debt, govt should SPEND money and tax less to get out of debt
Explain how this works.
7. Supply Side Economics
Believes inflation caused by lack of supply
Tax less ANDcut Government Spending
Trickle Down Economics
E.g. Ronald Reagan in 1980s (Reaganomics)
8. Monetary Policy
How to regulate the AMOUNT of Money we have
9. Monetary Policy (Milton Friedman and the Chicago School)
Control HOW MUCH MONEY is allowed into the economy
Less $ in economy (supply) = more VALUE each $ has
More $ put into economy = less VALUE each $ has
Can help regulate inflation / deflation of economy
Done through the FEDERAL RESERVE BANK system
10. THE FED
Federal Reserve Bank
Bank of the govt of the US
Can control $ supply& interest rates
(theoretically) may control inflation rate.
Fed Chairman:
Ben Bernake
11. How the Fed Effects Economy
Loans $ to all other banks in US
Establishes interest rates (the discount rate) those banks must pay to the Fed
Banks then raise or lower interest rates on loans to you, me and businesses
Banks borrow more when interest rates are low thus have more $ to lend
Banks borrow less when interest rates are high thus have less $ to lend
Sell bonds (like an IOU with interest) to banks in exchange for $.
Banks have less $ on hand so can not loan as much $ - discourages borrowing
Buy bonds back from banks
Banks gain $ so can loan more $ to you and me encourages borrowing
Can require banks to keep more or less $ in reserve and not available to loan out
12. The Fed at work (in theory)
Fed raises interest rates to banks
MasterCard (owned by Bank of America) then raises ITS interest rate to you.
Less demand
You then spend less.

This lowers prices

(less $ in circulation)
which helps fight inflation
13. For Homework
For Homework You are the presidents Economic Advisor. Pick an Economic Policy (Demand Side; Supply Side; Monetary) and explain WHY this concept would help get the nation out of its current economic slump. Be sure to address the problems with the OTHER arguments. Be ready to debate this in class. Be able to explain and teach it in simple terms.
(Remember, the American public generally understands things presented to them at no more than a 6th grade level)
Use historical examples as well to help back up your point
DUE__________________________
Essay format.
Spelling, grammar, style, punctuation, sentence structure, paragraph organization structure all count towards grade.
Write it like you will in college.
14. The Debate
You are a member of an economic think tank:
Either the American Association of Economic Advisors or the National Committee for Economic Growth or the Association of Classical Economics
You are to testify before Congress on a plan to spur the US economy out of its current slump
AAEA believes in Keynesian fiscal policy
NCEA believes in Supply Side fiscal policy
ACE believes in Classical Economics as best fiscal policy
All sides may argue use of monetary policy as well
OBJ: Get Congress to approve your plan to save the American economy
15. Roles
2 Economics Professors teach us about how your fiscal policy works
2 History Professors teach us about previous uses of your fiscal policy
2 Attack Dogs attack the viability of other fiscal policies
6 students per group x 3 groups = 18 students
Congressional Committee consists of 5 students
One member is chairman
Visual / Teaching Aids of some sort are required
May cite news sources from past 2 years to get personal stories of Americans
Each team gets12 to 15 minutes to make its caseFOR its policy
Other two teams each get 5- 7 minutes to attack the policy
Committee will meet over the course of three days in ___________________
Councils have _______ days to conduct research
16. Some graphs to help you think