Expansionary Fiscal Policy GDP? CPI ? Unemployment ? Problem? Solution? Government – Expansionary Fiscal Policy Tools: Decrease Taxes / Increase Govt. spending {Goal?} Federal Reserve – Expansionary Monetary Policy Tools: Decrease Interest rates (increase money supply) {Goal?} Long term growth trend = 3%

Contractionary Fiscal Policy GDP? CPI ? Unemployment ? Long term growth trend = 3% Problem? Solution? Government – Contractionary Fiscal Policy Tools: Increase Taxes / decrease Govt. spending {Goal?} Federal Reserve – Contractionary Monetary Policy Tools: Increase Interest rates (decrease money supply) {Goal?}

Who? Govt. or Fed Reserve What? (Tools?) (G spending or taxes [up or down]) or Interest Rates [up or down] When?

Economic Costs of Unemployment Unemployment keeps society from reaching its PPF Unemployment = lost output = “GDP Gap” = difference between Potential GDP and Actual GDP

Okun’s Law For every 1% unemployment above NRU = 2.5% GDP Gap The unemployment of 7% created a 3.75% loss of GDP Actual unemp 7% - 5.5% = 1.5 % 1.5 x 2.5 = 3.75% gap NRU = 5.5% Actual unemployment