1. Unit 3: Aggregate Demand and Supply and Fiscal Policy1
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ACDC Leadership 2015

2. Review
Identify the two types of tool boxes the government has to fix the economy
Explain and give examples of Expansionary Fiscal Policy
Explain and give examples of Contractionary Fiscal Policy
Explain the Multiplier Effect
Explain how to calculate the spending multiplier
Name 10 University Mascots 2
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3. Draw and Practice
Congress uses discretionary fiscal policy to the manipulate the following economy (MPC = .9)
LRAS
What type of gap?
Contractionary or Expansionary needed?
What are two options to fix the gap?
How much needed to close gap? AS P2
Price level
AD1 AD
-$5 Billion
$50FE $100
Real GDP (billions) 3
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ACDC Leadership 2015

4. Draw and Practice
Congress uses discretionary fiscal policy to the manipulate the following economy (MPC = .8)
LRAS
What type of gap?
Contractionary or Expansionary needed?
What are two options to fix the gap?
How much initial government spending is needed to close gap? AS
Price level P1
AD2
AD1
+$40 Billion
$ $1000FE
Real GDP (billions) 4
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5. Problems With Fiscal Policy5
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6. 5 Problems With Fiscal Policy
When there is a recessionary gap what two options does Congress have to fix it?
What’s wrong with combining both?
1. Deficit Spending!!!!
A Budget Deficit is when the government’s expenditures exceeds its revenue.
The National Debt is the accumulation of all the budget deficits over time.
If the Government increases spending without increasing taxes they will increase the annual deficit and the national debt.
Most economists agree that budget deficits are a necessary evil because forcing a balanced budget would not allow Congress to stimulate the economy.
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7. US National Debt
US Debt Clock
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8. The Onion: Government Stages Coup8
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9. 9
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10. 10
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11. 5 Problems with Fiscal Policy
2. Problems of Timing
Recognition Lag- Congress must react to economic indicators before it’s too late
Administrative Lag- Congress takes time to pass legislation
Operational Lag- Spending/planning takes time to organize and execute ( changing taxing is quicker)
3. Politically Motivated Policies
Politicians may use economically inappropriate policies to get reelected.
Ex: A senator promises more welfare and public works programs when there is already an inflationary gap.
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12. 5 Problems with Fiscal Policy
4. Crowding-Out Effect
In basketball, what is “Boxing Out”?
Government spending might cause unintended effects that weaken the impact of the policy.
Example:
We have a recessionary gap
Government creates new public library. (AD increases)
Now but consumer spend less on books (AD decreases)
Another Example:
The government increases spending but must borrow the money (AD increases)
This increases the price for money (the interest rate).
Interest rates rise so Investment to fall. (AD decrease)
The government “crowds out” consumers and/or investors
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13. 5 Problems with Fiscal Policy
5. Net Export Effect
International trade reduces the effectiveness of fiscal policies.
Example:
We have a recessionary gap so the government spends to increase AD.
The increase in AD causes an increase in price level and interest rates.
U.S. goods are now more expensive and the US dollar appreciates…
Foreign countries buy less. (Exports fall)
Net Exports (Exports-Imports) falls, decreasing AD.
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14. Review Activity

15. Activity: Review Circles
You will be given one key concept to focus on.
You must understand it well enough to quiz and help others remember it.
You must able to answer people’s questions and give clear examples.
DON’T TEACH!!!!!!!!!!
QUIZ your partners. Make them work to remember the concept. 15

16. Review Circles
Odd numbers
Even Numbers 16

17. List the 25 Concepts we have covered
Aggregate Demand
Real Balance Effect
Interest Rate Effect
Foreign Trade Effect
Shifters of AD (C,I,G,X)
Aggregate Supply
Shifter of AS (R.A.P.)
Short Run AS
Long Run AS
Two Types of Inflation
Ratchet Effect
Classic vs. Keynesian
Three Ranges of AS
14. Fiscal Policy
15. Discretionary vs. Non-Discretionary
16. Expansionary Policy
17. Contractionary Policy
18. The Car Analogy
19. Multiplier Effect
20. Calculating the Spending Multiplier
21. MPC and MPS
22. Deficit Spending
23. Timing Problems
24. Crowding-Out Effect
25. Net Exports Effect