supply side policy sfls online

Keep trade deficits low, but no percentage number as a guide

Supply Side Policies

AD = C + I + G + (X – M)

The fiscal policies so far have been about shifting the AD curve to control the economy.

Price level

GDP

AD

SRAS

PE

LRAS

YN

AD/AS Model

So we have been looking at policies

to control with graph…

Why the AD Curve Slopes DownwardP

Y

AD

P1

Y1

P2

Y2 Y1

Y = C + I + G + (X – M)

and it’s all about controlling this demand side…

Aggregate Demand

AD/AS ModelTotal spending in an economy in a given time period.

Y = C + I + G + (X – M)

Y = C + I + G + NX

or

Ceteris Paribus:• When the P level rises, the Q of

real GDP demanded decreases.• When the P level falls, the Q of

real GDP demanded increases.

with this wonderful equation.

Price level

GDP

SRAS

PE

LRAS

YN

AD/AS Model

What about the other curves of LRAS and SRAS?

Fiscal policy and government intervention

as we know it today started in the great

depression of the 1930’s by Keynes.

A Bar 酒吧 in 1974

Supply side policies as we know it today started in a

bar in 1974

A Bar 酒吧 in 1974 3 men are drinking and

chatting and 1 of the man draws a graph on a

napkin

This graphs shows that that when governments tax the

people it can expect different amounts of

revenue at different points.

At 0% tax rates they collect 0 revenue

At 100% tax rates they collect 0 revenue

Taxing more means more revenue on the front side of

the graph

Taxing too much means less revenue on the backside of the

graph

A Bar 酒吧 in 1974 These conservative men end up working for this

president…

Ronald ReaganPresident 1981-1989

Ronald ReaganPresident 1981-1989

And change the ideas of what fiscal policy can be

about

Trickle down Economics

Ronald ReaganPresident 1981-1989

涓滴经济学an economic system in which the poorest gradually benefit as a result of the increasing wealth of the richest.

These policies are about making the government

smaller and increasing AS instead.

AD = C + I + G + (X – M)

We looked at Fiscal Policy for the AD Side

Now for the policies of AS

Supply-side polices

Aggregate Supply Theories

Increase AS and LRAS by providing incentives for businesses to encourage more productivity and shift the AS curves outward.

- considers how to improve the productive capacity of the economy.

Aggregate Supply Theories

- typically are Microeconomic policies aimed at making markets and industries operate more efficiently.

- it tends to be associated with Monetarist and free market economics ideas.

Supply-side polices

Types of Supply-side Policy

- idea is that lower taxes (income and corporation) increase the incentives for people to work harder, leading to more output.

Reducing income taxes

Types of Supply-side Policy

Proportional Taxes

Poor Rich Average

A tax whose average rate is constant at all income levels.

pay10%

pay10%

pay10%

Proportional Taxes

Poor Rich Average

A tax whose average rate is constant at all income levels.

pay10%

pay10%

pay10%

Remember the question, “What is fair? Rules or Results?”

Supply-side people often think “Flat Taxes” is considered fair.

- reducing barriers to entry in order to make the market more competitive and giving control of business to business not government.

Reducing income taxes

Types of Supply-side Policy

Deregulation & Privatization

Im some ways with business it’s kind of the same. Let business do

business!

Reducing income taxes

Types of Supply-side Policy

Deregulation & Privatization

- give an incentive to get back to work by taking away help!

Reducing welfare benefits

Reducing income taxes

Types of Supply-side Policy

Deregulation & Privatization

- give an incentive to get back to work by taking away help!

Reducing welfare benefits

The Poverty trap idea.

Reducing income taxes

Types of Supply-side Policy

Deregulation & Privatization Reducing welfare benefits

- Take power away from Trade Unions and better education and mobility for workers.

More flexible labor markets

Workers may come together to fight for their

rights and for better wages. Supply-siders think this just

makes it more expensive for businesses and stops innovation, so often try to prevent trade unions from

having much power.

Goals and Benefits of Supply-side Policy

Macro Economic Goals1.) Full employment

About 5% unemployment2.) Stability (Prices)

3.) Economic growth

4.) Balance of Payments Equilibrium

About 2% inflation

About 3% growth (7% in China)

Keep trade deficits low, but no percentage number as a guide

Macro Economic Goals1.) Full employment

About 5% unemployment2.) Stability (Prices)

3.) Economic growth

4.) Balance of Payments Equilibrium

About 2% inflation

About 3% growth (7% in China)

Keep trade deficits low, but no percentage number as a guide

It’s all the same goals, this is just another way to think to achieve to these goals.

Benefits of Supply-side Policy - more jobs created

Benefits of Supply-side Policy - more jobs created- reduces inflation - more productivity and

lower costs mean lower prices.

Price level

GDP

AD

SRAS

PE

LRAS

YN

AD/AS Model

If increase AS = increase

Economy and lower prices!!!

SRAS1

Benefits of Supply-side Policy - more jobs created- reduces inflation - more economic growth

Benefits of Supply-side Policy - more jobs created- reduces inflation - more economic growth - increase trade balances - products more

competitive so can sell more.

Benefits of Supply-side Policy - more jobs created- reduces inflation - more economic growth - increase trade balances - products more

competitive so sell more.

1.) Full employment - about 5% unemployment2.) Stability (Prices) 3.) Economic growth

- about 2% inflation- about 3% growth (7% in China)

4.) Balance of Payments Equilibrium

Problems of Supply-side Policy

Problems of Supply-side Policy - Increases Inequality 涓滴经济学 - the rich get richer,

and the poor relatively poorer

= 垃圾学说

These kind of policies often have led to increasing

It can be said to be true that the poor are NOT getting poorer, that the

poor are still better off now then they

were before

It can be said to be true that the poor are NOT getting poorer, that the

poor are still better off now then they

were before…

It can be said to be true that the poor are NOT getting poorer, that the

poor are still better off now then they

were before…

However these policies have often

made this gap between rich and

poorer, much larger.

Problems of Supply-side Policy - Increases Inequality - still need AD growth涓滴经济学

= 无用如果没有加 AD

Problems of Supply-side Policy - Increases Inequality - still need AD growth- Time lags - takes a long time to see

the results.

Problems of Supply-side Policy - Increases Inequality - still need AD growth- Time lags- can be very costly to implement

- for example education programs are not free.

AD = C + I + G + (X – M)

Resources to do Fiscal Policy

Also Supply Side policies…

- annual expenditures and tax receipts of the government. 支出和税收

Fiscal Policy

Fiscal Policy AD = C + I + G +

(X – M) Fiscal Budget

Even with supply-side policies, still need to maintain a budget

- annual expenditures and tax receipts of the government. 支出和税收

Fiscal Policy

Fiscal Policy AD = C + I + G +

(X – M) Fiscal Budget

- if expenditures exceeds tax receipts. Budget Deficit 支出 税收>

Actually under Reagan the deficit became much worse then

before!

- annual expenditures and tax receipts of the government. 支出和税收

Fiscal Policy

Fiscal Policy AD = C + I + G +

(X – M) Fiscal Budget

- if expenditures exceeds tax receipts. Budget Deficit 支出 税收>- if tax receipts exceeds expenditures. Budget Surplus 支出税收>

- annual expenditures and tax receipts of the government. 支出和税收

Fiscal Policy

Fiscal Policy AD = C + I + G +

(X – M) Fiscal Budget

- if expenditures exceeds tax receipts. Budget Deficit 支出 税收>- if tax receipts exceeds expenditures. Budget Surplus 支出税收>

- if tax receipts equals expenditures. Balanced Budget

支出税收=

Fiscal Policy AD = C + I + G +

(X – M) Fiscal BudgetBudget Deficit vs. Budget Surplus

The government borrows to finance a budget deficit and repays its debt when it has a budget surplus.

政府借到预算赤字融资。政府偿还其债务时，有预算盈余。The amount of debt outstanding that arises from past budget deficits is called national debt.旧债从过去的预算赤字总额被称为国家债务。

AD = C + I + G + (X – M)

Fiscal Policy

Budget Deficit Problem:

AD = C + I + G + (X – M)

Budget Deficit Problem:

Crowding out: - Government spending and borrowing that may fail to increase AD and hurts 排挤 private investment.

When the government has to borrow, it needs to borrow from the private sector. This could be private individuals, pension funds or investment trusts. It is argued that if the private sector buy government securities this will crowd out 排挤 private sector investment.

AD = C + I + G + (X – M)

Budget Deficit Problem:

Crowding out:

- Typically this deals with the increase of interest rates due to attempting to sell more bonds to finance debt

When the government has to borrow, it needs to borrow from the private sector. This could be private individuals, pension funds or investment trusts. It is argued that if the private sector buy government securities this will crowd out 排挤 private sector investment.

- Government spending and borrowing that may fail to increase AD and hurts 排挤 private investment.

AD = C + I + G + (X – M)

Budget Deficit Problem:

Long term debt: - Borrowed money has to be paid back with interest over time meaning to total costs will be higher.

Crowding out:

- Future budgets will have less discretionary spending ability due to having to pay back old loans

Thank is all for nowThank you