Fiscal Policy

1. Draw an Inflationary Gap. LRAS Graph 2.Draw a Recessionary Gap. LRAS Graph3.Draw the “creative process”

Near Pod Review

Stabilizing the EconomyThe Government has

two different tool boxes it can use:

1. Fiscal Policy-Actions by Congress to

stabilize the economy.OR

2. Monetary Policy-Actions by the

Federal Reserve Bank to stabilize the

economy.

For now we are just going to focus on Fiscal Policy.

Taxes & Government SpendingØMost of the $3.7 trillion the government

receives each year is already spent.ØAfter they fulfill their legal obligations, only

about 40% of the money is left.

Let me tell you how it will beThere's one for you, nineteen for me

Cos I'm the taxman, yeah, I'm the taxman

“Taxman” written by George Harrison

Off the Beatles Revolver album 1966

2 Types of Fiscal SpendingMandatory Spending:AKA: Automatic StabilizersØ Permanent spending or

taxation laws enacted to work counter cyclically to stabilize the economy

Ex: Welfare, Unemployment, Min. Wage, etc.Ø When there is high

unemployment, unemployment benefits to citizens increase consumer spending.

Discretionary Spending:Ø Congress creates a new

bill that is designed to change AD through government spending or taxation.

Ex: In a recession, Congress increase spending.

Taxes & Government SpendingEach year mandatory spending accounts over 60 percent of the federal budget. The two largest mandatory spending programs are Medicare and Social Security, which together account for over 40 percent of the federal budget.

*Almost half the budget it taken up by old people

40%MedicareSocial Security

Discretionary Spending

Notice, where is education?

Close a Inflationary Gap by decreasing GDP Ø Decrease Government

SpendingØ Increase TaxesØ Combination of both

Fiscal Policy

Close a Recessionary Gapby increasing GDPØ Increase Government

SpendingØ Decrease TaxesØ Combination of both

ExpansionaryContractionary

Explain the results of Calvin’s proposal using AS and AD.

Review

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