Download Stabilization Policies

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Students will explain the operations and
impact of fiscal policy
Students will distinguish between supply-side
economics and fiscal policy
Students will state the basic assumptions of
monetary policy
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Fiscal Policy
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The Federal government’s attempt to stabilize the
economy through taxing and government spending
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Keynesian Economics (demand-side
economics)
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The theory that the federal government should
increase or decrease aggregate demand to achieve
economic goals (such as lowering unemployment)
 Examples
 1932 – Franklin D. Roosevelt instituted his New Deal
program to try and restore the economy. This was an
expansionary policy that paid people to build highways,
parks, schools, etc. The objective was to create jobs using
public works projects
 2001 – George Bush proposed and signed into law tax cuts
to stimulate the economy followed by a tax rebate stimulus
 2009 – the Obama administration stimulus package
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The Keynesian Framework
Multiplier
 Change in overall spending caused by a change in
investment spending
 Accelerator
 Change in investment spending caused by a
change in overall spending
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The role of government
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Government should step in to offset changes in
investment sector spending
Automatic stabilizers
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Programs that automatically trigger benefits if
changes in the economy threaten income
Unemployment insurance
 Insurance that workers who lose their jobs through
no fault of their own can collect for a limited
amount of time
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Fiscal policy and aggregate demand
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When aggregate demand is very low the
government can increase spending to increase
aggregate demand
 Public works projects
Limitations of Fiscal Policy
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Many times the government only uses the automatic
stabilizers due to budgetary concerns
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Supply-side economics
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Smaller role for government
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Policies designed to stimulate output and lower
unemployment by increasing production rather than
demand
Reduces governments role – reduced government
agencies, deregulation, etc
Lower federal taxes
Allows individuals and businesses to keep more money
which encourages people to work harder, be more
productive, and spend more money
 Laffer Curve
 Graph that shows that lower tax rates will stimulate
higher tax revenues
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Supply-side policies and aggregate supply
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Quantities produced at different possible prices
Limitations of supply side policies
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Not enough experience with these policies and really
know how they affect the economy
Used more to promote economic growth than to fix
economic instability
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Monetarism
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Interest Rates and Inflation
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A doctrine that places primary importance on the role of
money and its growth
Wage-price controls
 Regulations that make it illegal for businesses to raise
wages or prices without permission from the
government
Monetary policy and unemployment
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Monetarist will agree that an attempt to lower
unemployment by expanding the money supply is only a
temporary solution and will cause other economic
problems such as inflation.