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Unit V: Monetary and Fiscal Policy

Unit V: Monetary and Fiscal Policy. Combinations: Stabilization Policy in the Real World. Unit V Lesson 1. “Lags” associated with Policy Making. Inside Lag - Time it takes for: Data to be collected Policy makers to recognize that policy action is necessary

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Unit V: Monetary and Fiscal Policy

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

  2. Unit V Lesson 1 “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

  3. Unit V Lesson 1 • 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

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

  5. Unit V Lesson 1 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

  6. Unit V Lesson 1 Explain and IllustrateVisual 5.1

  7. Unit V Lesson 1 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

  8. Unit V Lesson 1 Explain and IllustrateVisual 5.2

  9. Unit V Lesson 1 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

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

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

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

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

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

  15. Unit V Lesson 4 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

  16. Unit V Lesson 4 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.

  17. Unit V Lesson 4 • 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

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

  19. Unit V Lesson 5 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

  20. Unit V Lesson 5 • 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

  21. Unit V Lesson 5 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

  22. REVIEW FOR UNIT V EXAM

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