Introduction to Economics Johnstown High School Mr. Cox Fiscal Policy

Fiscal Policy is the method of taxing and spending used by the Government to help reach macroeconomic goals. Fiscal Policy Tools: 1) Spending 2) Cuts 3) Taxing

Keynesian Theory John Maynard Keynes – 1930’s British Economist Published texts that helped bring Britain out of the Great Depression Advocated for Government intervention as a stabilizer for an economy Increase aggregate demand through spending and programs Would lead to more money in the hands of consumers, thus stimulating the economy This would, in turn, lead directly to increased GNP as producers would increase supply to meet demand Contradicts Laissez-Faire policies, which suggests minimal government intervention in the economy Free market will solve its own problems through the natural business cycle

Fiscal Policy Expansionary vs. Contractionary Expansionary Policy- Increase Spending, Decrease Taxes, Increase in Government Transfers Used to Stimulate the economy during a recession FDR’s New Deal – based on the fact that moderation of the effects of the business cycle is an important function of the Federal Gov. Contractionary Policy- Decrease Spending, Increase Taxes, Decrease in Government Transfers Used to slow growth during an inflationary BOOM

How does the government determine how to spend its money? Budget Process- Surplus, Deficit, or Balanced 1.Office of Management and Budget (OMB) i.Works with the President to put together a draft of the budget. 2.Congress i.Reviews the budget draft and makes changes 3.President i.Signs the budget or Veto’s the budget

Built-in or Automatic Stabilizers Programs that automatically help to counter-act cyclical change in the economy without any legislative action. Unemployment Compensation Corporate Profit Tax Progressive Income Tax What is happening with these programs during a recessionary gap or inflationary gap?

Budget Deficit Budget Surplus vs. Budget Deficit Surplus= Contractionary Policy Deficit= Expansionary Policy Should the budget be balanced? Problems of prolonged deficits: Increased Public or National Debt Problems with a forced balanced budget: Lessens impact of fiscal policy ability

Employment and Unemployment Employment is the number of people working in the economy. Unemployment is the number of people who are actively looking for work but aren’t currently employed. The labor force is equal to the sum of employment and unemployment.

Employment and Unemployment Discouraged workers are non-working people who are capable of working but are not actively looking for a job. Underemployment is the number of people who work during a recession but receive lower wages than they would during an expansion due to smaller number of hours worked, lower-paying jobs, or both. The unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force, either currently working or looking for jobs. Note: Rate does not include part-time workers or people who give up looking for employment

10 Underemployment

Types of Unemployment Seasonal – when people become unemployed due to seasonal jobs Farmers in the winter, ski instructor in the summer Structural – worker cannot find a job due to shift in the market structure Worker’s skills become obsolete and are no longer needed (natural) Cyclical – worker cannot find a job because of business cycle Ups and downs in businesses profits, (unnatural unemployment) Frictional – Worker has yet to find job that is available College graduate is searching for job that has yet to be found (natural)

Unemployment Rate