The greatest second part of fiscal policy powerpoint ever made

Business Cycles Key Terms Expansion Long term growth Trend Peak Recession Trough Expansion Recession Boom Long term growth trend Downturn Upturn Trough Peak Jan.- Mar Total Output Apr.- June July- Sept. Oct.- Dec.

Aggregate Demand & Supply Remember: Aggregate – collective, the whole, everything added up Same shape as regular supply and demand X Axis is output/real GDP

Fiscal Policy Fiscal Policy intends to fix, via government intervention, the interruptions caused by the business cycle Expansionary Contractionary

Types of Fiscal Policy Expansionary Contractionary Government spending more money than is being brought in to speed up economy Prices go up minimizing recession Government bringing in more money than it is spending to slow down the economy Prices go down, minimizing bubble GDP AD’ GDP AD’

Why does giving people money help? Maximizing GDP is a core goal of the federal government in its fiscal policy GDP is determined by the following formula: GDP(Y)=C+I+G+X Consumption, Investment, Government, Net Exports

GDP (Y)=C+I+G+X C Giving people money increases consumption, thereby increasing GDP I Investment is businesses investing in new factories, etc. G If the government spends money, that also increases GDP X Net Exports is Total Exports Minus Imports (negative for US)

Marginal Propensity to Consume/Save Economists refer to MPC and MPS when looking at how government spending helps MPC is the change in spending over the change in income MPS is the change in saving over the change in income

MPC If you were given a dollar more than you currently have, how much of that dollar would you spend? 80 cents? – MPC=.8 25 cents – MPC =.25 All of it? – MPC = 1

MPS If you decided to spend 80 cents of your dollar, your MPC would be .8. Therefore your MPS is simple to derive MPC + MPS = 1 MPS = .2

So who cares. Econ sucks.  MPC is how we figure out the spending multiplier 1/(1-MPC) 1/(1-.8) 1/.2 5 This means that for each 1 dollar given, spending (C) increased by $5 So does GDP GDP= C+I+G+X

In summary GDP = C + I + G + X Expansionary Fiscal policy aims to increase C Marginal propensity to consume is our increase in spending divided by our increase in income The multiplier 1/(1-MPC) shows how much our GDP can be increased