Fiscal and Monetary Policy

Economy is TOO BIG

Inflation

Economy is TOO SMALL

Recession

Fiscal Policy

The Federal Governments use of TAXING and SPENDING to keep economy stable

Tool one

Taxes (5 trillion)

Tool two

Spending (7 trillion)

Discretionary Spending

(800 billion) money spent on non-essential items

Classical Economists

Believe that the best way to fix the economy is to do NOTHING

Keynesian Economists

Believe that the best way to fix the economy is to increase spending during a recess8ion (fiscal policy)

What time is Keynesian Economists from?

from the great depression (1930’s)

why do Keynesians believe government is the only solution

government is the only solution because markets can get stuck below full employment

what is the multiplier effect?

one person's spending becomes another's income, creating jobs and further demand

• Gov spends $1, GDP goes up $5

How can you make the multiplier bigger?

Spend the money

How can you make the multiplier smaller?

save the money

Supply side economist

believe the best way to fix economy is to lower taxes.

• believe that taxes are too high

Solution to recession

Expansionary Policy

• decrease taxes

• increase spending

solution to inflation

contractionary policy

• increase taxes

• decrease spending

problems with expansionary policy

CREATES DEBT

• government spends more than they get back

problems with contractionary policy

POLITICALLY UNPOPULAR: once you start its hard to stop

broken window theory

there should be a limit to what the government can spend (some spending is bad and unnessesary)

limits of fiscal policy

• difficulty changing spending levels

• predicting the future

• delayed results

• political pressure (timing)