Warm Up: True or False (If FALSE, make it into a true statement by changing the word(s) in yellow) 1.To correct an inflationary problem in the U.S., the AD curve needs to shift to the right. 2.Using an expansionary fiscal policy results in interest rates going up. 3.Supporters of fiscal policy believe that inflation can be reduced by increasing the money supply. 4.Keynes believed that spending money was the key to controlling the economy during a recession. 5.Full employment implies that unemployment is zero in the U.S.

Today you are going to converse with various partners Each time you see the prompt ‘ Talk to a partner ‘ find a different person to talk to – you may not talk to the same person twice!

1.) What are the 3 macro goals of the U.S. economy? 2.) What problems may result from too much inflation? 3.) What problems may result from a recession Warm Up Talk to a partner:

Two Major Problems That Can Occur in Our Economy [extremes of the business cycle): Recession/Depression: - Low GDP/high unemployment Inflation: -Prices increasing too quickly HOW DO YOU FIX THEM???

FISCAL POLICY

Definition Fiscal Policy can be defined as what the government does with taxes or government spending to stabilize the economy during periods of recession or inflation. What the U.S. government does to try and stabilize the economy

Talk to a partner: What are the 2 tools of fiscal policy?

1)Increasing/Decreasing Taxes 2) Government Spending

Three Possible Results of Fiscal Policy: 1.Budget Deficit: government spending greater than tax revenue 2.Budget Surplus: government spending is less than tax revenue 3.Balanced Budget: government spending=tax revenue

Create a Tree Map with each of the 3 terms, their definition and an illustration that we just went over!

How Fiscal Policy Started… Before the Great Depression, the U.S. adopted a policy of laissez-faire (no government intervention) But with the economy in such an economic crisis during the 1930s, citizens cried out for the gov’t to take action and play a more active role in the economy

Talk to your partner: Why do you think citizens wanted the government to become more “ACTIVE”?

John Maynard Keynes He was FDR’s economic guru during the Great Depression. He advised the president that the only way to bring the economy out of a recession was for the government to play a more active role in the economy ( spend money ). Therefore, Keynes is noted for being the founder of fiscal policy. Fiscal Policy greatly increased the role of the government in the United States.

Talk to your partner: In what way is Keynes’ advice to FDR different from the policy of laissez-faire?

Problem: Recession/Depression SOLUTION: –The government pursues an expansionary fiscal policy: Increasing government spending Decreasing taxes The intention is to increase GDP and lower unemployment =Expansionary Fiscal Policy

Talk to your partner: How does increasing government spending and/or lowering taxes help fight the problem of a recession???

Problem: Inflation (prices rising) SOLUTION: –The government pursues a contractionary fiscal policy Decreasing government spending Increasing taxes The intention is to lower/slow down rising prices = Contractionary Fiscal Policy

Talk to your partner: How does decreasing government spending and/or increasing taxes help to fight the problem of inflation???

Wrap-Up 1.What are the 2 extremes of the business cycle? 2.What type of fiscal policy should be pursued to fight a recession? 3.What type of fiscal policy should be pursued to fight inflation? 4.Who’s the founder of Fiscal Policy? 5.What does laissez-faire mean?