MACRO ECONOMIC GOVERNMENT POLICY

NATIONAL ECONOMIC POLICY GOALS Sustained economic growth as measured by gross domestic product (GDP) GDP is total amount of goods and services produced in the US each year Low inflation Full employment

UNEMPLOYMENT Measured by the Bureau of Labor Statistics Definition “members of the labor force who are looking for work, but unable to find jobs.” Unemployment rate = % unemployed Estimate is low - “discouraged workers” not included

INFLATION Defined as the sustained rise in prices Measured by the Consumer Price Index (CPI) Inflation reduces purchasing power of consumers Comparing real GDP between years means accounting for inflation (GDP deflator)

BUSINESS CYCLE Periods of GDP growth are called expansions or boom periods 6 months of falling GDP is called a recession. Severe GDP drop is depression Top of the business cycle is peak Bottom recession called trough

FISCAL POLICY Government tax and spending policies designed to stimulate or contract GDP During recession government seeks to use stimulatory fiscal policy During an expansion and rising prices government seeks to use contractionary fiscal policy

KEYNESIAN ECONOMICS John Maynard Keynes called for increased government spending and tax cuts during the Great Depression Keynesian economics focuses on government tax and spending policies

STIMULATORY FISCAL POLICY Goal is to increase employment and GDP during a recession increase government spending Tax cuts also stimulates consumer spending and business investment Consumption up + Business Investment up + Government up +NX = GDP up

CONTRACTIONARY FISCAL POLICY Designed to bring inflation down Government spending decreases Tax increases

AUTOMATIC STABILIZERS Unemployment insurance goes up during a recession, therefore consumption is maintained even with unemployment During a recession taxes decline due to progressive tax policy During an expansion taxes increase as consumers and businesses generate more income.

GOVERNMENT BORROWING Keynes believed that during a recession governments should deficit spend to fund programs (not increase taxes) Governments borrow by selling Treasury bills. T-bills are purchased by wealthy individuals, businesses, and foreign investors

NATIONAL DEBT In recent years national debt has increased. Clinton years government ran a surplus due to tax increases and the dot.com expansion Bush years government ran a deficit and national debt increased due to tax cuts and financing war in Iraq.

MONETARY POLICY US government can expand money supply during a recession or contract money supply during an expansion Money supply is controlled by the Federal Reserve Banks

FEDERAL RESERVE BANK 14 districts Federal Reserve chairman - Benjamin Bernanke Federal Reserve

MONEY SUPPLY Total amount of money circulating in the economy Money supply is determined by the federal reserve banks

“LOOSE” MONEY Federal reserve can expand the money supply during a recession by 1. Lowering reserve rate required for member banks 2. Lowering rediscount rate (interest rate charged by the Fed) 3. Buying Bonds, which puts more money in bond holders hands

“TIGHT” MONEY Federal Reserve can try to slow down inflation by: 1. Raising reserve rate 2. Raising rediscount rate 3. Selling bonds, which takes money out of the private economy

TIME LAG PROBLEM IN ECONOMIC POLICY The problem with government economic problem is that each policy takes time to work. Often by the time the problem is diagnosed and fiscal or monetary policy are in place the economy has changed. This is called the “time lag” problem.

Taxes Largest source of government income is individual income taxes US has progressive income tax structure (wealthier groups pay higher percentage) Social Security taxes (FICA) are tax on wages Additional taxes include: corporate taxes, estate taxes, state income tax, sales

Social Security Passed during Depression to create a pension for all Americans 6.2 % of income Not a fund, current workers pay for retiring workers Ratio of retiress to workers rising, therefore long term not enough to cover retirees

Solutions to Social Security Increase social security tax Get rid of income cap on taxes Increase age of beneficiaries Privatize social security to make IRA Increase immigration to increase percentage of current workers to retirees

World trade US imports 14% of GDP Exports 12% of GDP Last several years, US running large trade deficits (value of imports higher than exports) Some Americans suggesting tariffs (taxes on foreign goods) or quotas on foreign goods to reduce imports.

Free Trade versus Protectionism Free Trade advocates say US benefits from lower prices on foreign goods and the ability to export US products to foreign countries Protectionists argue US not being treated fairly in foreign markets and are losing important jobs at home to foreign competition.

Globalization and Trade Organizations World Trade Organization (WTO) member countries monitors and negotiates trade disputes North American Free Trade Organization (Canada, US and Mexico) European Union (EU)