EOCT Review Question #1EOCT Review Question #1 During what stage of the business cycle During what stage of the business cycle

would frictional unemployment be the would frictional unemployment be the largest?largest?

A.A. PeakPeakB.B. RecessionRecessionC.C. TroughTroughD.D. recoveryrecovery

EOCT Review Question #2EOCT Review Question #2 If we have progressive tax system and If we have progressive tax system and

Billy pays $1.000.00 on his $10,000 Billy pays $1.000.00 on his $10,000 income, what is true of Sue’s tax liability income, what is true of Sue’s tax liability if she earns $40,000.00?if she earns $40,000.00?

A.A. It is exactly $4,000.00It is exactly $4,000.00B.B. It is less than $4,000.00It is less than $4,000.00C.C. It is more than $4,000.00It is more than $4,000.00

EOCT Review Question #3EOCT Review Question #3 Which of the following would cause cost-Which of the following would cause cost-

push inflation?push inflation?

A.A. 20% increase in natural gas prices20% increase in natural gas pricesB.B. 20% growth in the stock market20% growth in the stock marketC.C. 20% cut in federal income tax20% cut in federal income taxD.D. 20% increase in grain production20% increase in grain production

EOCT Review Question #4EOCT Review Question #4 Which group is most likely to suffer from Which group is most likely to suffer from

higher rates of unemployment and higher rates of unemployment and poverty than most others?poverty than most others?

A.A. MinoritiesMinoritiesB.B. People with limited educationPeople with limited educationC.C. Single parents Single parents D.D. Two-parent familiesTwo-parent families

Fiscal PolicyFiscal PolicyChapter 15

Points to RememberPoints to Remember Prior to the Great Depression Prior to the Great Depression

economists believed that the best economists believed that the best way to stabilize the economy was way to stabilize the economy was through the natural market forcesthrough the natural market forces

Adam Smith and supply side Adam Smith and supply side economicseconomics

After the Great DepressionAfter the Great Depression Remember:Remember:

– KeynesKeynes– government needs to aid the economy government needs to aid the economy – demand side economicsdemand side economics

Fiscal “Tools”Fiscal “Tools”

1.1. Government Purchases/SpendingGovernment Purchases/Spending2.2. Transfer PaymentsTransfer Payments3.3. TaxesTaxes

……and how these three affect and how these three affect macroeconomic variables such macroeconomic variables such as real GDP, employment, the as real GDP, employment, the price level, and economic price level, and economic growthgrowth

Know these!

What is Fiscal Policy?What is Fiscal Policy? Government taxing and Government taxing and

spendingspending used to move the used to move the economy toward full employment economy toward full employment with price stabilitywith price stability

Potential output- the maximum the maximum sustainable output in the long run sustainable output in the long run given the supply of resources, given the supply of resources, technology and “rules of the technology and “rules of the game” that nurture production game” that nurture production and exchangeand exchange– AKA- full employment output and AKA- full employment output and

price stabilityprice stability

Remember

the PPF?

How could this relate to your study habits?

$20$2000

How just a little Fiscal Policy can How just a little Fiscal Policy can effect our economy in a BIG way.effect our economy in a BIG way.

$15$1500

$15$1500

$50 (already $50 (already in his pocket)in his pocket)

$200 already $200 already in his pocket)in his pocket)

$40$4000

MultiplierMultiplier EffectEffectFor every dollar spent by the For every dollar spent by the federal government, GDP will federal government, GDP will increase by moreincrease by more than that $1. than that $1.

This could also be affected by This could also be affected by business invention or change in business invention or change in consumption - but Keynes focused consumption - but Keynes focused on the on the government’s role in his government’s role in his book General Theory.book General Theory.

Fiscal Policy and TaxesFiscal Policy and Taxes An increase in tax rates = decreased An increase in tax rates = decreased

disposable income = consumption & disposable income = consumption & real GDP decreasereal GDP decrease

A decrease in taxes = increases A decrease in taxes = increases disposable income = consumption & disposable income = consumption & real GDP increasereal GDP increase

What is disposable income?What is disposable income?

Fiscal Policy and TaxesFiscal Policy and Taxes

Taxes Disposable Income

Consumption & Real GDP

Taxes Disposable Income

Consumption & Real GDP

So which is better HIGHER or LOWER TAXES? WHY?

Disposable IncomeDisposable Income This is the income This is the income

available after taxesavailable after taxes

This is the money This is the money consumers have to consumers have to spendspend

Less taxes = more Less taxes = more money to spendmoney to spend

SAY IT WITH ME: “We like Disposable Income!”

Quick ReviewQuick ReviewWhat are the What are the 3 components3 components of fiscal of fiscal

policy?policy?

What will What will higher taxes resulthigher taxes result in? in?

What is the What is the multiplier effectmultiplier effect??

What is What is disposable incomedisposable income??

EOCT Review…EOCT Review…

C + I + G + (X – M) = GDPC + I + G + (X – M) = GDP

How do they calculate the GDP?How do they calculate the GDP?

EOCT Review…EOCT Review… What happens to the GDP in each of these What happens to the GDP in each of these

scenarios? What aspect of GDP is scenarios? What aspect of GDP is affected and how?affected and how?

The government decides to hire 3,500 The government decides to hire 3,500 new employees to work as park rangers.new employees to work as park rangers.

Consumers by fewer American made Consumers by fewer American made cars, and more Japanese made cars.cars, and more Japanese made cars.

Businesses are optimistic about the Businesses are optimistic about the future, they begin to build more factoriesfuture, they begin to build more factories

Due to better economic conditions in Due to better economic conditions in Europe, Europeans purchase more Europe, Europeans purchase more American goods and services.American goods and services.

Government Use of Fiscal PolicyGovernment Use of Fiscal Policy

1.1. When the economy is in a slump When the economy is in a slump ((recession or depressionrecession or depression)) the economy the economy has contracted.has contracted.

The government will enact an The government will enact an Expansionary Fiscal PolicyExpansionary Fiscal Policy to help to help boost the economy.boost the economy.

Government Use of Fiscal PolicyGovernment Use of Fiscal Policy

2.2. When the economy has picked up When the economy has picked up the pace the pace ((an economic booman economic boom)) the the economy has expanded.economy has expanded.

The government will enact an The government will enact an Contractionary fiscal policyContractionary fiscal policy to help to help slow down the economy.slow down the economy.

Difficulty in Calculating EffectsDifficulty in Calculating Effects Remember the multiplier effect.Remember the multiplier effect.

It is difficult to judge how large of an It is difficult to judge how large of an expansion or contraction a change in expansion or contraction a change in any single fiscal policy (taxes, any single fiscal policy (taxes, transfer payments, etc) will produce transfer payments, etc) will produce in the economyin the economy

Sum it up...Sum it up...Economy is in Economy is in a recession or a recession or

depressiondepressionExpansionarExpansionar

y Fiscal y Fiscal PolicyPolicy

Economy is in Economy is in a booma boom

Contractionary Contractionary Fiscal PolicyFiscal Policy

Two Categories of Fiscal Policy:Two Categories of Fiscal Policy:

1)1) Discretionary fiscal policy- Discretionary fiscal policy- requires congressional actionrequires congressional action

2) Automatic Stabilizers- usually the 2) Automatic Stabilizers- usually the results of these actions in the results of these actions in the future (unemployment insurance)future (unemployment insurance)