1. Unit V: Monetary and Fiscal Policy Combinations: Stabilization Policy in the Real World

2. “Lags” associated with Policy Making Inside Lag - Time it takes for: Data to be collected Policy makers to recognize that policy action is necessary Decision about which policy should be taken Implementation of the policy Unit V Lesson 1

3. Outside (Impact) Lag Time it takes for the economy to respond to the new policy These lags differ in length for monetary and fiscal policy Unit V Lesson 1

4. Complete Activity 43 and review answers Unit V Lesson 1

5. Government in a deficit Borrows money to finance its deficit Results in an increase in the demand for money (demand for loanable funds) Results in an increase in the interest rate Higher Interest Rates cause a decrease in investment and interest sensitive components of consumer demand Crowding out – decrease in private demand for funds when the government’s demand for funds causes the interest rates to rise Unit V Lesson 1

6. Explain and Illustrate Visual 5.1 Unit V Lesson 1

7. Loanable Funds Market Demand for funds in this market comes from: The private sector (business investment and consumer borrowing) The government sector (budget deficits) Foreign sector Supply of funds in the this market comes from: Private savings (businesses and households) The government sector (budget surpluses) The Federal Reserve (money supply) Foreign sector Unit V Lesson 1

8. Explain and Illustrate Visual 5.2 Unit V Lesson 1

9. Indirect effect of government budget deficits Barro-Ricardo effect Possibility that these deficits will lead to an increase in private savings and a decrease in consumption that offsets the predicted expansionary effects of expansionary policy Unit V Lesson 1

10. Complete Activity 44 and review answers Unit V Lesson 1

11. Explain and Illustrate Visual 5.3; Go through steps identified in teacher’s manual Unit V Lesson 2

12. Complete Activity 45 and review answers Unit V Lesson 2

13. Explain and Illustrate Visual 5.4; Go through steps identified in teacher’s manual Unit V Lesson 3

14. Complete Activity 46 and review answers Unit V Lesson 3

15. Economic Growth For growth to occur, economic agents – producers and consumers – must have appropriate incentives Growth accounting focuses on three sources of long-run economic growth: Supply of labor Supply of capital The level of technology In the most fundamental sense, economic growth is concerned with increasing an economy’s total productive capacity Unit V Lesson 4

16. How can these “levers of growth” be stimulated Increasing savings will increase the supply of loanable funds, decrease interest rates and spur investment or increases in the capital stock Tax incentives are the principal method to increase savings Increasing government support for basic research will stimulate research and development National Science Foundation grants are one mechanism used in the U.S. Unit V Lesson 4

17. Getting the most from comparative advantage by encouraging international trade will also stimulate growth throughout the world Growth can also be stimulated by improving the quality and capabilities of the labor force so workers can be more productive with a given level of capital and technology The U.S. has focused on improving the quality of public education and using education IRAS Unit V Lesson 4

18. Complete Activity 47 and review answers Unit V Lesson 4

19. More Lags Recognition lag The time it takes for policy makers to see there is a problem with the economy (3 to 6 months) Decision or Response lag The time it takes policy makers to decide and implement the policy response to the current economic problem Monetary Policy decision lag – usually very short (one quarter Fiscal Policy decision lag – can be several quarters to more than a year These combined make up the Inside lag Unit V Lesson 5

20. Transmission or impact lag (the outside lag) - the time it takes the change in policy to have an effect on the economy Transmission lag for monetary policy is long and variable Transmission lag for fiscal policy is generally very short Unit V Lesson 5

21. Reasons why prices and wages do not adjust quickly Menu costs It costs firms money to change their prices – for example, to issue new catalogs or change price tags Labor contracts Multiyear contracts prohibit changes in wages and may mandate COLA’s Firms operating in imperfectly competitive markets worry about changing prices and getting into price wars with their competitors Thus firms may be slow to adjust prices to changes in costs or demand Unit V Lesson 5

22. REVIEW FOR UNIT V EXAM