The 2008 Bailout and Fiscal Policy. Remember Business Cycles – We were in recession 07 --08...

The 2008 Bailout and Fiscal Policy

Remember

• Business Cycles – We were in recession

07 --08 --09--10

Why do we need a bailout?

• Businesses were failing due to stock market crash– Mostly bulky large

businesses which were wrapped up in the stock market with options, derivatives, futures, etc.

• Entire industries and countries were collapsing– GDP declining

Too big to fail?

• The government determined that some companies were too big to fail– General Motors– Ford Motors– Chrysler– Bank of America– Merrill Lynch– AIG

• What makes a company too big to fail?

Fiscal Policy

• Fiscal policy is the government expenditure and revenue collection to influence the economy– Expansionary• Government spends more than it has to boost the

economy– Put money in people’s pockets

– Contractionary• Government increases taxes to slow down the economy

– Take money out of people’s pockets

Fiscal Policy

• Contractionary Expansionary

Aggregate Supply/Demand

• The United States • Aggregate refers to the entire economy instead of one sector– Instead of supply and

demand for pumpkins, this is overall supply and demand

GDP

How expansionary fiscal policy affects Agg D and S

• By pursuing expansionary fiscal policy, the government can boost demand

• Giving people money is increasing their income– Remember that income

is a determinant of demand

GDP

AD’

How expansionary fiscal policy affects Agg D and S

• Expansionary fiscal policy has 2 effects:–1. Increases

output/GDP–2. Increases prices• This is called

inflationGDP

AD’

Mr. Garcia

RULES!!!!!

This Week

Monday – Tuesday – BailoutWed – Fiscal PolicyThurs. – Book WorkFriday – ArticlesMonday – Review of Cycles and Fiscal Policy/QuizTuesday – Monetary Policy ActivityWednesday – Monetary Policy