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AP Economics
March 30,
2015
1. Review Unit
3 Exam
2. Lesson 4-1:
Intro to
Fiscal Policy
3. HW:
Activities 5-1
through 5-3
The economy is like a car…
• You can drive 120 mph but it is not sustainable.
(Extremely Low unemployment)
• Driving 20 mph is too slow. The car can easily go
faster. (High unemployment)
• 70mph is sustainable. (Full employment)
• Some cars have the capacity to drive faster then
others. (industrial nations vs. 3rd world nations)
• If the engine (technology) or the gas mileage
(productivity) increase then the car can drive and
sustain at even higher speeds. (Increase LRAS)
The government’s job is to brake or speed up when
needed as well as promote things that will improve
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the engine. (Shift the PPC outward)
March 31, 2015
1. Continue Lesson 4-1: Introduction to Fiscal
Policy
2. HW: Activities 5-1 through 5-3
3. Return Make Up Quizzes
4. NO CURRENT EVENT THIS WEEK
5. UNIT 4 EXAM SCHEDULED FOR 4/16 & 4/17
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How does the Government Stabilizes the
Economy?
The Government
has two different
tool boxes it can
use:
1. Fiscal PolicyActions by Congress
(Spending/Taxes)
OR
2. Monetary PolicyActions by the
Federal Reserve
Bank
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Contractionary Fiscal Policy (The BRAKE)
Laws that reduce inflation, decrease GDP (Close a Inflationary
Gap)
• Decrease Government Spending (Assets from the Gov to the
People)
• Tax Increases (Assets from the People to the Gov)
• Both decrease the amount of money available to the people
• Some Combination of the Two
• Side Effect: UR Up
Expansionary Fiscal Policy (The GAS)
Laws that reduce unemployment and increase GDP (Close a
Recessionary Gap)
• Increase Government Spending
• Decrease Taxes on consumers
• Both increase the amount of money available to the People
• Some Combination of the Two
• Side Effect: Inflation Up
How much should the Government Spend?
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Price level
• What type of gap?
• What type of policy is best?
• What should the government do to spending? Why?
• How much should the government spend?
LRAS
AS
The government should
increasing spending
which would increase AD
They should NOT spend 100
billion!!!!!!!!!!
If they spend 100 billion, AD
would look like this:
WHY?
P1
AD2
AD1
$400 $500
Y*
Real GDP (billions)
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The Multiplier Effect
Why do cities want the Superbowl in their stadium?
Spending Multiplier!
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Discretionary Fiscal Policy- When
government chooses to change G or T
• Congress creates a new bill that is designed to change
AD through government spending or taxation.
•Problem is time lags due to bureaucracy.
•Takes time for Congress to act.
•Ex: In a recession, Congress increase spending.
Non-Discretionary Fiscal Policy
•AKA: Automatic Stabilizers
•Permanent spending or taxation laws enacted to
stabilize the economy
•Ex: Welfare, Unemployment, Min. Wage, etc.
•When there is high unemployment, unemployment
benefits to citizens increase consumer spending.
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