Economic Theories to Control Business Cycle Option 1: No

government interference- Adam Smith Supply and demand

will eventually find equilibrium price and the cycle will even out

Option 2: Government helps even out the business cycle- John Maynard Keynes

Laissez faire economics: No interference by government Adam Smith writes

Wealth of Nations Written in 1776 Criticizes mercantilism Criticizes protective

tariffs Charge on importing a

good Believes that supply and

demand are the “invisible hand” of economics

Customers will always look for the highest quality and the cheapest price

Keynesian Theory: Government should set in Idea of John Maynard

Keynes Government can

control business cycle by how much it spends Government can

raise and lower taxes Government can

control how much it spends

Government can create demand

Fiscal Policy

Government can raise or lower taxes Raise taxes- Less

demand Lower taxes- Higher

demand Government can

raise or lower government spending Raise spending-

Higher demand Less spending-

Lower demand

Government can raise personal income taxes1. Government raises taxes

in expansion

2. People have less money to spend

3. Less demand

4. Less demand means lower prices

5. Controls inflation or the rise in prices

Government can lower personal income taxes1. Government would lower taxes in a recession

2. People have more money to spend

3. Demand is created

4. More demand means that businesses will increase supply because they are selling more

5. Production goes up

6. More workers are needed to keep up with production

7. Unemployment is reduced. Country gets out of recession

Government can spend more money1. Government spends money in a recession.

2. Government is increasing demand

3. Businesses will want to increase supply

4. More workers are needed to keep up with production.

5. Unemployment goes down due to increased production.

6. More people have money to spend

7. Demand continues to go up.

8. Businesses can continue to hire.

9. Country gets out of recession

Government can decrease spending1. Government decreases spending in an expansion.

2. Government buys less stuff.

3. Lowers demand.

4. Prices go down. Businesses reduce supply because not making any money.

5. Lay off workers or downsize

6. People have less money to spend.

7. Demand continues to decrease.

8. Prices continue to fall. Leads to deflation.

Lower corporate taxes: Supply side economics Idea of Ronald

Reagan in the 1980’s

Also known as trickle down economics

1. Lower corporate income taxes in a recession

2. This lowers the cost of running a business

3. Lower costs leads to increased supply.

4. Increase in supply leads to decreased prices.

5. Lower prices create demand.

6. Demand leads to increased production.

7. Businesses can hire more employees.

8. Unemployment rate decreases.

9. Joe the Plumber has more money.

10. Joe can buy more.

11. Demand continues to increase. GDP goes up. Get out of recession