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BELL RINGER If the unemployment rate was rising, what type of monetary policy would the Federal Reserve implement? JOHN MAYNARD KEYNES British economist who had a new idea of how to minimize the fluctuations of the business cycle. 1. What are the similarities and differences between the Great Depression of the 1930s and the crisis that began in 2008? 2. According to Keynes, what is the “paradox of thrift”? Do you think it is true? 3. What was Keynes, “big idea”? Do you think it was the right remedy for ending the Great Depression? Why? Do you think it is the right remedy today for ending the Great Recession? Why? EMPLOYMENT ACT OF 1946 “The Congress hereby declares that it is the continuing policy of the Federal Government to use all practicable means … to promote maximum employment, production, and purchasing power.” FISCAL POLICY Changes government makes in spending or taxation to achieve particular economic goals FISCAL POLICY Expansionary Fiscal Policy • Increase in Federal spending • Decrease in Federal taxes • Objective is to reduce the unemployment rate Contractionary Fiscal Policy • Decrease in Federal spending • Increase in Federal taxes • Objective is to reduce inflationary pressures EXPANSIONARY OR CONTRACTIONARY? The economy is suffering from its worst slowdown in 30 years. Unemployment has reached 10%. The annual inflation rate is slowing and now stands at 2.5%. The unemployment rate has fallen to the lowest level in a decade, 2.3%. But inflation has risen to 8%. The unemployment rate remains steady at 11%. The annual inflation rate is 8.5% and rising. EXPANSIONARY FISCAL POLICY The Government increases spending and/or reduces taxes. More government spending means more spending in the economy. Increased spending means firms are selling and producing more goods. If firms are selling and producing more goods, they will hire more workers. CONTRACTIONARY FISCAL POLICY Government decreases spending and/or increases taxes. This leads to less overall spending in the economy. Less spending means that firms will sell fewer goods. If they sell fewer goods, firms will have a surplus and prices will go down. BELL RINGER What is the Employment Act of 1946? “The Congress hereby declares that it is the continuing policy of the Federal Government to use all practicable means … to promote maximum employment, production, and purchasing power.” AUTOMATIC STABILIZERS Fiscal policies that, without any new action by Congress or the President, change gov’t spending and taxes. • Examples • Unemployment compensation • Reduction in taxes (progressive tax rate) OTHER ISSUES WITH FISCAL POLICY Recognition lag • The time it takes policymakers to recognize a problem in the economy Administrative lag • The time it takes to change fiscal policy Operational lag • The time between adopting new policies and the policies having an effect Crowding out • The situation when increases in government spending lead to reductions in private spending Crowding in • The situation when decreases in government spending lead to increases in private spending MONETARY POLICY Helps stabilize the economy even when fiscal policy makers can’t Changes the Fed makes in the money supply • Discount rate • Reserve requirement • Open market operations Monetary and Fiscal Policy Review – due tomorrow BELL RINGER Why can it be difficult to implement fiscal policy? BELL RINGER What are some concerns you have about our growing national debt? DEFICIT VS. DEBT Deficit – occurs when the government spends more money than it collects in taxes in a year. Debt – total amount of money the government owes. It has been accumulating since the beginning of our nation’s history. Surplus – occurs when the government spends less money than it collects in taxes in a year. Source: Congressional Budget Office US National Debt http://www.usdebtclock.org/ A GUIDE TO THE FEDERAL BUDGET DEFICIT AND NATIONAL DEBT 1. What is the national debt? How is the public debt different than the national debt? 2. Why should Americans worry about the growing national debt? 3. What are the differences between “discretionary” and “entitlement” spending? Which kind of spending do you think would be hardest for Congress and the president to cut? Why? THE FEDERAL BUDGET TEN TRILLION AND COUNTING How did we get into our current situation of massive budget deficit and a national debt that is growing at an unprecedented rate? BELL RINGER What was one of the “politically smart” economic policies President Bush enacted? BELL RINGER What are the three macroeconomic indicators that are used to measure the health of our nation’s economy? UNIT 4 TEST Thursday 45 pts 10 Vocabulary Matching 20 Multiple Choice 6 Essays (you choose 3) BELL RINGER What are the three tools of monetary policy and the two tools of fiscal policy? AFTER THE TEST: Pick up a copy of Globalization at Home Due Monday, January 5th