[ 9.2 ] Fiscal Policy Options Learning Objectives Compare and contrast classical economics and demand-side economics. Analyze the importance of John Maynard Keynes and his economic theories. Explain the basic principles of supply-side economics and the importance of Milton Friedman. Analyze the impact of fiscal policy decisions on the economy of the United States.

Classical Economics Classical economics taught that a struggling economy would recover on its own, but the Great Depression lasted for many years.

Keynesian Economics Keynes presented his ideas in 1936 in a book called The General Theory of Employment, Interest, and Money.

Keynesian Economics Keynes sought to achieve the full productive capacity of the economy. According to Keynes, what could fill the gap between low output and full productive capacity?

Keynesian Economics The multiplier effect helps explain how government spending boosts the economy. Explain how the multiplier effect supports Keynesian theory.

Supply-Side Economics The Laffer curve shows the theoretical effect increasingly higher tax rates have on tax revenues. According to the Laffer curve, what do both a very high and a very low tax rate produce?

The Recent History of U.S. Fiscal Policy The top marginal tax rates—rates affecting the highest incomes—have varied widely over the last century. What has been the general trend in the top marginal tax rate since 1945?

Quiz: Classical Economics During the Great Depression, the U.S. economy seemed to defy the theories of classical economics. Which of the following illustrates this point? A. Supply should have increased as prices fell, but it did not. B. The supply of goods remained high, but prices continued to fall. C. Quantity demanded should have increased as prices fell, but it did not. D. The demand for goods remained strong, but prices continued to fall.

Quiz: Supply-Side Economics A basic principle of supply-side theory is that a tax cut A. decreases tax revenue. B. decreases employment. C. increases consumer demand. D. increases economic output.

Quiz: The Recent History of U.S. Fiscal Policy How did President Reagan bring about a shift in U.S. economic policy? A. He revived President Roosevelt’s Keynesian approach. B. He instituted policies based on supply-side economics. C. He increased taxes to reduce the budget deficit. D. He cut the defense budget to avoid deficit spending.