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Similar to Monetary and fiscal policy notes and debat directions (20)
Monetary and fiscal policy notes and debat directions
- 1. Monetary and Fiscal PolicyHonors Current Issues
- 2. Classical vs Keynesian EconClassical Econ theoryPrices rise – we buy less (demand goes down) – surpluses – prices drop – we buy more.When we buy less, businesses lay off workers – less people with jobs – less buying – recession or depression.Eventually, businesses drop prices to point where people buy stuff – businesses make $ - businesses hire more workers – workers spend $ - Depression over
- 3. Classical System, Government had no role in management of the economy – “Laissez-faire” or “do nothing”If the economy faces an inflationary gap (equilibrium at a level higher than full employment), Government must reduce demand by spending less; raise taxes; increase interest rates; reducing welfare
- 4. Fiscal Policy“How to Spend and Tax Our Money”
- 5. Keynesian Economics: “Demand Side Economics”John Maynard Keynes (early 1900s)Economies are unstable and always changingInflation caused by DEMAND – Too many $ trying to buy too few goodsEconomies will NOT balance themselves out in a timely mannerToo many people will get hurt waiting for the economy to adjust to imbalance in Supply & DemandGovernment must step in to correct the inherent instability of the economy
- 6. Fiscal Policy (Keynes view)In a recession (not enough spending) Government must increase demand by spending more; lowering taxes; lowering interest rates; increasing welfareExamples: FDR’s New Deal programs, Bush/Obama’s “Stimulus Package”“Deficit Spending” is goodWhen in debt, govt should SPEND money and tax less to get out of debtExplain how this works.
- 7. Supply Side EconomicsBelieves inflation caused by lack of supplyTax less ANDcut Government Spending“Trickle Down Economics”E.g. Ronald Reagan in 1980s (“Reaganomics”)
- 8. Monetary PolicyHow to regulate the AMOUNT of Money we have
- 9. Monetary Policy (Milton Friedman and the Chicago School)Control HOW MUCH MONEY is allowed into the economyLess $ in economy (supply) = more VALUE each $ hasMore $ put into economy = less VALUE each $ hasCan help regulate inflation / deflation of economyDone through the FEDERAL RESERVE BANK system
- 10. “THE FED”Federal Reserve BankBank of the govt of the USCan control $ supply& interest rates(theoretically) may control inflation rate.Fed Chairman:Ben Bernake
- 11. How the Fed Effects EconomyLoans $ to all other banks in USEstablishes interest rates (the “discount rate”) those banks must pay to the FedBanks then raise or lower interest rates on loans to you, me and businessesBanks borrow more when interest rates are low – thus have more $ to lendBanks borrow less when interest rates are high – thus have less $ to lendSell bonds (like an IOU with interest) to banks in exchange for $.Banks have less $ on hand so can not loan as much $ - discourages borrowingBuy bonds back from banksBanks gain $ so can loan more $ to you and me – encourages borrowingCan require banks to keep more or less $ in reserve and not available to loan out
- 12. The Fed at work (in theory)Fed raises interest rates to banksMasterCard (owned by Bank of America) then raises ITS interest rate to you. Less demandYou then spend less. This lowers prices(less $ in circulation) which helps fight inflation
- 13. For HomeworkFor Homework – You are the president’s Economic Advisor. Pick an Economic Policy (Demand Side; Supply Side; Monetary) and explain WHY this concept would help get the nation out of its current economic slump. Be sure to address the problems with the OTHER arguments. Be ready to debate this in class. Be able to explain and teach it in simple terms. (Remember, the American public generally understands things presented to them at no more than a 6th grade level)Use historical examples as well to help back up your pointDUE__________________________Essay format.Spelling, grammar, style, punctuation, sentence structure, paragraph organization structure all count towards grade.Write it like you will in college.
- 14. The DebateYou are a member of an economic think tank:Either the “American Association of Economic Advisors” or the “National Committee for Economic Growth” or the “Association of Classical Economics”You are to testify before Congress on a plan to spur the US economy out of its current slumpAAEA believes in Keynesian fiscal policyNCEA believes in Supply Side fiscal policyACE believes in Classical Economics as best fiscal policyAll sides may argue use of monetary policy as wellOBJ: Get Congress to approve your plan to save the American economy
- 15. Roles2 Economics Professors – teach us about how your fiscal policy works2 History Professors – teach us about previous uses of your fiscal policy2 “Attack Dogs” – attack the viability of other fiscal policies6 students per group x 3 groups = 18 studentsCongressional Committee consists of 5 studentsOne member is chairmanVisual / Teaching Aids of some sort are requiredMay cite news sources from past 2 years to get personal stories of AmericansEach team gets 12 to 15 minutes to make its caseFOR its policyOther two teams each get 5- 7 minutes to attack the policyCommittee will meet over the course of three days in ___________________Councils have _______ days to conduct research
- 16. Some graphs to help you think