FISCAL POLICY LECTURE 7

FRANKLIN ROOSEVELT In 1933 President FDR realized that the government had a responsibility to get the country on sound fiscal policy. He approached this through a Keynesian model.

THE KEYNESIAN MODEL Keynes recognized that the U.S. economy is the largest economy in the world. He saw that the economy is never in an equilibrium position, rather it moves towards equilibrium, never actually achieving it. This is part of the dynamics of capitalism.

RECESSION Recession is another word we don’t like in economics. It’s almost as bad as the “I” word! We’ve suffered through three recessions since 1990.

PROSPERITY From 1983 through 1990 we enjoyed a period of prosperity. The proverbial straw that broke the camel’s back was the first Gulf War.

RECESSION Consumer demand dropped at the beginning of the war and caused a reduction in all categories of sales: Cars Real Estate Large Appliances Capital & Durable Goods

FEAR “The only thing we have to fear is … fear itself”. President Franklin D. Roosevelt

PSYCHOLOGY OF FEAR People are afraid to make major financial commitments when the economy or their future seems uncertain.

FEAR When fear takes over the consumption component of aggregate demand drops even further in reaction to the negative economic news.

INVESTMENT SECTOR The business community reevaluates it’s investment expenditures as negative psychology spreads through the economy. Expansion projects are put on hold. Replacement projects are put on hold.

REACTION The investment sector will wait for a clearer picture of the economy to emerge before making any substantial financial commitments.

GOLDEN NUGGET How far output will fall before equilibrium is reached is known as the recessionary gap.

KEYNES The Keynesian multiplier is the economic tool needed to answer the question of what is the recessionary gap?

THE MULTIPLIER Simply put; an initial change in one of the components of AD will trigger off changes in AD that ultimately will be larger than the initial change. For an action there can be a positive reaction.

FISCAL POLICY Manipulation of the expenditures and taxes of the federal government to achieve certain economic goals. Fiscal policy stabilizes an economy. The government uses fiscal policy through spending and tax policy.

FISCAL POLICY IS ECONOMIC

KENNEDY & KEYNES President John F. Kennedy was the first president to fully accept the theories of Keynes. In 1962 he asked for a tax cut to help stimulate the economy to end a recession.

WEALTH We all like wealth! How do we measure it? Find Net Worth.

GOLDEN NUGGET Net worth is the difference between total assets and total debts.

PARADOX OF THRIFT What is it? Where savings are necessary as a source of funds to be borrowed by the business sector for investment purposes.

PARADOX A problem develops when the consumer saves more than the business sector is willing to invest.

GOLDEN NUGGET If society tries to save more money than is desired by the business sector, the result is that less will actually be saved.

INFLATION & RECESSION In economics we can have what are known as gaps. We have two kinds of gaps: Inflationary Recessionary

RECESSIONARY GAP The amount that AD would have to increase to bring about full- employment.

INFLATIONARY GAP An inflationary gap causes prices to increase instead of output.

A SECOND KEYNES Keynes recognized several factors in capitalism. 1.Instability of capitalism. 2.Evolution since Adam Smith. 3.Federal Gov’t. must take an active role in the economy.

GOLDEN NUGGET Keynes believed that the government should maintain a low profile when there is no major economic problem. When one does occur the government should rush to our economic rescue.

EWOT We have studied three steps in our economic way of thinking. 1.The concept of the multiplier. 2.The role of psychology. 3.The fear factor.

GOLDEN NUGGET Very successful entrepreneurs are not afraid to take reasonable risks or to be different, whether in business or in their personal lives.

KEY TERMS Fiscal Policy Inflationary gap Multiplier Paradox of thrift Recessionary gap

LETS DO IT AGAIN!!