Chapter 15: Economic Stabilization

What are demand-side policies?

increase/decrease total demand in the economy

What is fiscal policy (demand-side policies)?

federal government’s attempt to influence/stabilize economy through taxing & spending

Who influenced demand-side policies?

economist John Maynard Keynes

What are some characteristics of demand-side policies?

• Stimulate consumption of goods/services to spur output

• Cut taxes or increase federal spending to put money into people’s hands; business will increase output

• “Supply creates demand”

What are automatic stabilizers?

programs that automatically trigger benefits

What are entitlements?

health, nutrition, income supplement; assistance to the unemployed, underemployed, elderly, retirees, etc.

What is progressive income tax?

if a person earns less money, they pay less in taxes

What is the problem with automatic stabilizers?

government unable to limit/reduce its spending

What are two kinds of automatic stabilizers?

• entitlements

• progressive income tax

What are supply side policies?

stimulate output & lower unemployment by increasing production

Who influenced supply-side policies?

 economists Robert Mundell & Arthur Laffer

What are characteristics of supply- side policies?

• Stimulate production to spur output

• Cut taxes and government regulations on businesses (deregulation)

• Businesses expand/invest; jobs created; government collects more revenue later

• “Demand creates its own supply”

What are the problems of supply-side policies?

due to inflation, tax cuts actually declined so businesses weren’t reinvesting, so government not collecting more revenue

What is monetarism?

stable monetary growth can lead to control of inflation & stimulate long term economic growth

What can tightening monetary do?

raise interest rates if prices rapidly rise

What could expansionary monetary policy do?

lower interest rates, leading to increased borrowing (mortgages, businesses, etc.)

What is fiscal policy?

the government attempts to influence the economy through taxing and spending actions

How does fiscal policy speed up the economy?

with tax cuts or more federal spending

How does fiscal policy slow down the economy?

with tax increases or reducing federal spending

What are the three types of fiscal policy?

1. discretionary

2. passive

3. structural

What is discretionary policy?

policy that someone must choose to implement (Congress, the president, or another gov’t agency)

What is an example of discretionary policy?

Federal expenditure to build a highway

What is passive policy?

don’t require new or special action to go into effect; the policies automatically trigger when economy changes

What are examples of passive policy?

Unemployment insurance, Social Security benefits (automatic stabilizers)

What is structural policy?

strengthen the economy over a longer period of time

What are examples of structural policy?

Reforming Social Security or welfare to make them more financially sound over the long-term (supply side policies)

What type of fiscal policy was used from the 1940s to 1980s?

discretionary policy used often to get the economy moving, but it is not used often anymore

What are reasons for the change in fiscal policies (from 1940s-1980s to now)

• Lag time between recognizing a problem and solving the problem; it takes months to recognize a recession and even more months for Congress to pass spending laws, then implementing the spending takes more months, then putting the money into the economy

• Gridlock in Congress between Republicans & Democrats

• Ideology: a set of beliefs; if the President wants to create new policy to strengthen the economy long-term, that could alter fiscal policy

What is monetary policy?

conducted by the Federal Reserve; changing the amount and availability of credit in order to change interest rates

What is an example of monetary policy?

after 9/11 attacks, Federal Reserve (the Fed) continually lowered rates every month to stimulate borrowing (mortgages, car loans, etc.)

What are “economic politics?”

politicians are concerned with the economic consequences of their actions

What is an example of “economic politics?”

Congress often debates for days over federal spending and raising/lowering taxes

What do economists differ over?

policy

What are examples of economists differing over policy?

some think unemployment is the critical issue, others think inflation, and others think spending

What are policies often a product of?

their times

What are examples of policies being a product of their times?

• 1930s: Demand-side policies

• 1980s: Supply-side policies

• 2010s-2020s: Baby boomers (people born between 1946-1964) retiring; Social Security & Medicare may need to be altered

What is the council of economic advisers?

3 member group who advises the president on economic development and proposes strategies (combat inflation, balance the budget, create jobs, etc.)

What can the council of economic advisers do?

• President may or may not take their advice

• they are only advisers; politicians direct or implement the decisions