MACRO ECONOMIC GOVERNMENT POLICY

1. MACRO ECONOMIC GOVERNMENT POLICY

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

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

10. 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.

11. 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

12. 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.

13. 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

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

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

16. “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

17. “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

18. 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.

19. 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

20. 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

21. 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

22. 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.

23. 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.

24. Globalization and Trade Organizations • World Trade Organization (WTO) - 140 member countries monitors and negotiates trade disputes • North American Free Trade Organization (Canada, US and Mexico) • European Union (EU)