The Health of the Economy
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The Health of the Economy What is wrong and what can be done?. Measuring the Health of the Economy. Fixing the Economy. Unit 4. TC. Gross Domestic Production. Unemployment rate. Inflation. Enduring Understandings. Real and Nominal, per capita. Consumer Price Index.

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The health of the economy what is wrong and what can be done

The Health of the Economy

What is wrong and what can be done?


The health of the economy what is wrong and what can be done

Measuring the Health of the Economy

Fixing the Economy


The health of the economy what is wrong and what can be done

Unit 4

TC

Gross Domestic Production

Unemployment rate

Inflation

Enduring Understandings

Real and Nominal, per capita

Consumer Price Index

Government actions affect economic activity.

Economic decisions require the government to evaluate the costs and benefits of actions.

Draw and identify phases of the business cycle

Aggregate

Aggregate Supply- describe both the Keynesian and Classical models

Essential Questions

  • How should the U.S. government carry out its economic roles?

  • How healthy is the American economy

Fiscal Policy

Aggregate Demand

Monetary Policy

Stagflation

Progressive Tax Rate

Terms


The health of the economy what is wrong and what can be done

Circular Flow Model

TC

Profit maximizing rule of hiring MRP= MRC

Income

Cost

Resource Markets

Resources- factors of production

Land Labor capital entrepreneurship

Resources- factors of production

Demand

Supply

Resources and labor

Gov’t

Spending

Business

Individuals

Government

Taxes

Taxes and loans

MR= MC

Profit Maximizing

Rule

MB= MC

Utility Maximization

Transfer Payments

Subsidies

Public Goods/Services

Public Goods/Services

Consumer

Government

Investors

MSB= MSC

Consumers

+

Investors

+

Government

+

Net Exports

__________

Gross Domestic Production

Gov’t

Spending

Goods and

Services

Goods and Services

Goods and Services

Loans

Demand

Supply

Product Markets

Interest

Financial

Revenue

Spending

(MC) S= D (MB) or (MR)

Marginal- additional, MB= Marginal Benefit, MC= Marginal Cost, MR- Marginal Revenue, MRP- Revenue product, MRC- Resource cost,

MSB- Marginal Social Benefit, MSC- Marginal Social Cost


The health of the economy what is wrong and what can be done

Identify Key terms and answer the associated questions

TC

Part 1 (GDP)

G.D.P. (Gross Domestic Product)-

What factors contribute to the GDP?On another piece of paper chart the US GDP from 2000- 2011 (by year)

What goods and service are not calculated in the GDP?Next chart US real GDP from 2008-2011 by quarter

Explain:

Nominal GDP

Real GDP

GDP per Capita

Explain how unemployment is it related to GDP?

Part 2 (Unemployment)

Explain the different types of unemployment and what is the natural rate of unemployment?

Frictional

Structural

Cyclical

Season

What is the natural rate of unemployment? Why is this ok?

If our current unemployment rate is 9% how much is the cyclical unemployment?

What groups of the population is not counted toward unemployment rates?

What is real unemployment?What is our current unemployment rate?


The health of the economy what is wrong and what can be done

Part 3: The purchasing power of money

What is inflation?

What does higher inflation do the purchasing power of money?

How does this impact price?

What is CPI (Consumer Price Index)

How does the Consumer price index measure inflation?

TC

Part 4: The Business Cycle

Diagram and Identify the different phases of the business cycle:

If the business cycle is natural and unavoidable should the government become involved? Explain your answer

To economist when is the business cycle officially in a recession?


The health of the economy what is wrong and what can be done

Part 5: Government Role and the Recession:

Aggregate Supply and Demand (AS/AD)

What is Aggregate Demand

What is LRAS?

What is Aggregate Supply

Part 6:

What is the difference between Classical vs Keynesian Approach to Aggregate Supply?

How would an economist who believed in the classical approach draw Aggregate Supply? Why?

What would Keynesian economists say the Aggregate Supply , Aggregate Demand, and Price?

How does the Aggregate Supply depending on what model you are looking at? What are the three different phases?

What is Keynesian economics and what does it say about the government’s role in getting the economy out of a recession?

TC


The health of the economy what is wrong and what can be done

Part 7: Phillips Curve (inflation and unemployment) (Long and Short Run)

TC

Explain the Phillips Curve and explain how we get short run and long run Phillip’s Curve

Part 8: Fiscal Policy and Monetary policy

Explain Fiscal Policy:

Explain Monetary policy:

How do both try to fix recessions and inflation?

Recession

Fiscal

Monetary

Inflation

Fiscal

Monetary


The health of the economy what is wrong and what can be done

Measuring

The

Health of the Economy


The health of the economy what is wrong and what can be done

Economic Indicators

TC

Measure health of economy

Regardless of what you learn for the next two weeks

Remember these some important points:

Economics is the Allocation of scarce resources to their most useful purpose.

Remember the key lesson on economics- don’t look at policy in isolation, look at future phases, and measure policy by consequences and outcomes and not by intentions. This will come into play when we learn about “fixing” the health of the economy.

What is unseen is just as important as what is seen!!!!

4. Regardless of statistics and numbers the most important thing to consider is standard of living. Very difficult to measure happiness.

Correlation does not mean Causation!!!!!!

Money is not Wealth- Only true production increases standard of living. All the money in the world will not help an economy if goods and services are unavailable. Only the production of valued goods and services in a market which reflects the consumer’s wishes can relieve poverty and promote prosperity.


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Gross Domestic Product- the market value for all final goods and services produced within a country during a given period of time.

A steadily growing GDP is generally considered a sign of economic health.

The Department of Commerce’s Bureau of Economic Analysis determine the GDP.

Click here to find our current GDP. http://www.bea.gov/

Terms:

Final Good- a new good ready to be used by a consumer- cereal, cars, toys

Intermediate good- a good that is used in the production of a final good- not counted toward GDP. Example- grains, steel, rubber

What else is not counted. . .

The buying of financial assets are not counted because they do not reflect current production.

Secondhand sales do not count because the counted for the GDP of some previous year.

Intermediate goods are not counted in order to avoid double counting

Market Value- price buyers are willing to pay in the market place

Film on G.D.P. (Gross Domestic Product)


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

How do we calculate GDP?

C

Household Consumption/

Consumer spending

I

Business Investment

G

Government Spending

NX

Exports

Net Exports

Imports

GDP


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Types of GDP

Nominal GDP:Measuring GDP with today’s prices

Real GDP:Measuring GDP using a base year’s value of the dollar- this compensates for inflation

(Nominal GDP/GDP Price index) * 100

GDP per Capita:GDP per person, dividing GDP by the population

GDP Deflator= Nominal/Real *100


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Nominal GDP by nation 2011

GDP growth rate by nation 2011

http://www.tradingeconomics.com/gdp-growth-rates-list-by-country


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Gross Domestic Product- maps


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Gross Domestic Product- maps


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Real Growth rate


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Distribution of wealth 0 = total equality 1= total inequality


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

There are some important correlations (associations/relationships)

Remember correlation does not mean causation!!!

Nations with high GDP’s generally have the following. . .

High Literacy Rates

Improved health, nutrition, and high life expectancy

Lower infant mortality rates

Higher standards of living


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

There are some limitations to GDP

GDP leaves out unpaid work such as households and volunteer work

Volunteer firefighters, charity

2. GDP leaves out informal and illegal exchanges

Babysitting, working under the table, black markets, barter

GDP counts negatives as positives.

rebuilding after a hurricane, war efforts, over- exploiting resources

4. GDP does not reflect negative externalities

Pollution, people buying bottle water because of pollution

GDP places no value on leisure time or happiness

GDP says nothing about income distribution


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

There are other limitations to GDP

For example GDP measures things that were once done at home but now are considered work.

Housekeeping or gardening

Also it literally tries attempts to compare apples and oranges or more accurately bananas and oil.

It says nothing about the time it takes to create a product.


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

"The Gross National Product includes air pollution and advertising for cigarettes, and ambulance to clear our highways of carnage.

It counts special locks for our doors, and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior.

It grows with the production of napalm and missiles and nuclear warheads... And if GNP includes all this, there is much that it does not comprehend.

It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike.

It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials...

GNP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country.

It measures everything, in short, except that which makes life worthwhile; and it can tell us everything about America - except whether we are proud to be Americans."

- Senator Robert Kennedy. 1968


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC


The health of the economy what is wrong and what can be done

Gross Domestic Product

TC

Evaluate the following quote from Milton Friedman

“Spending isn’t good, what is good is producing. What we want to have is more goods and services. Government spending is ok for those things, those services that we believe that we can get more usefully and more effectively through government. If people are getting their money’s worth- fine. That’s why it is very desirable to have government expenditures occur as much at the local level as possible, because you as a citizen of a local community can judge if you are getting your money’s worth and you can decide if you want to spend it. But when it comes to the federal government you tend to think that you are spending someone else’s money. In a way you are, but he is spending yours.

The Broken Window Fallacy

What is the problem with adding up total spending to find total production?

Spending and Production are not the same thing


The health of the economy what is wrong and what can be done

Unemployment rate

TC

The Bureau of Labor Statistics tracks the unemployment rate.

Click here to track our current unemployment rate. http://www.bls.gov/

The unemployment rate is used to measure the overall health of the economy.

In general a high unemployment rate indicates an unhealthy economy.

The BLS will conduct a random survey to determine the unemployment rate.

The are 3 classifications of people in the country.

Employed- members of the labor force who have jobs.

Unemployed- members of the labor force who don’t have jobs but are looking for work

Not in the labor force- those who are eligible to be in the labor force but don’t have jobs and are not looking for jobs. This includes full time students, disabled, retired, and those prevented by family responsibilities.


The health of the economy what is wrong and what can be done

Unemployment rate

TC

The labor force is found by adding all employed and unemployed workers together.

To find the unemployment rate the BLS divides the unemployed by the labor force and multiples the number by 100.

number unemployed

Unemployment rate = ______________________________ X 100

number in labor force


The health of the economy what is wrong and what can be done

Unemployment rate

TC

In 2008, The Phillies won the World Series

Based on the data below and using the equation provided calculate the unemployment rate

U.S. Unemployment rate October 2008

Employed (145.3 million)

Unemployed (9.5 million)

Not in labor force (79.6 million)

Adult population (234.4 million)

Unemployment rate = ______________________ x 100 =

9.5 million

6.1%

154.8 million


The health of the economy what is wrong and what can be done

Unemployment rate

TC

Unemploymentlesson

Types of Unemployment and Full employment

Frictional Unemployment- When a worker enters the workforce or quits a job to find a better job.

Structural/Technological Unemployment- when advances in technology eliminate jobs


The health of the economy what is wrong and what can be done

Unemployment rate

TC

Unemploymentlesson

Types of Unemployment and Full employment

Seasonal Unemployment- When a business shuts down during part of the year

Cyclical Unemployment-Occurs when there is a decline in business because of the economic downturn


The health of the economy what is wrong and what can be done

Unemployment rate

TC

Unemploymentlesson

Types of Unemployment and Full employment

There will always be Frictional, Structural, and Seasonal unemployment.

This is the natural rate of unemployment- NRU

The NRU is about 5%.

This is also considered Full Employment

It is Cyclical Unemployment that we need to be the most concerned with.

This happens during down periods of the economy. Currently we have a 9% unemployment rate.


The health of the economy what is wrong and what can be done

Unemployment rate

TC

Unemploymentlesson


The health of the economy what is wrong and what can be done

Unemployment rate

TC

Problems with Unemployment rate as an indicator

1. Unemployment does not count discouraged workers or in other words those who have given up looking for work. Some say that if we counted these people in the unemployment calculations the our real unemployment rate is 17%.

2. Additionally, involuntary part-time workers are not counted as part of the unemployment rate. These are the people who would like full time jobs but can only get part-time hours. They are partially employed.

3. Does not count under the table workers or illegal activity.

Economic cost of Unemployment

Lost of potential output.

Loss of income by workers

The unemployed do not contribute to taxes and in fact usually collect unemployment insurance

If the number of unemployed becomes too large, money from other programs must be shifted to unemployment programs or taxes are raised on those who have jobs.


The health of the economy what is wrong and what can be done

Unemployment rate

TC


The health of the economy what is wrong and what can be done

More important than unemployment rate is production.

Providing jobs for the sake of employment and not production is one of the biggest fallacies.


The health of the economy what is wrong and what can be done

There is a positive relationship between GDP and employment


The health of the economy what is wrong and what can be done

Money

TC

1. If tobacco served as money predict how tobacco farmers would respond.2. Joe is stranded on an island made of gold. Joe dies in a week- why?3. You live in a society where there is no money. You mow lawns in the summer, would it be more or less difficult to trade a mowed lawn for a book bag? Why?4. "they are taking our money" is a common argument from anti-trade advocates. What is the flaw of this argument. Hint: what is the answer for question 2.

Purpose of money1. Medium of exchange- transactions are easier to conduct

2. Store of value

3. Measure of value


The health of the economy what is wrong and what can be done

Inflation Rate

TC

The inflation rate is the percent of increase in the average price level of goods and services from one month or year to the next.

In other words inflation reduces the purchasing power of money.

It is tracked by the Bureau of Labor Statistics.

http://www.bls.gov/bls/inflation.htm

Imagine living in a country where if you ate breakfast at a café your second cup of coffee would cost more than the first or if you burned you cash because it was worth more as fuel than as currency.

Excessive Inflation can send a nation’s economy into a tailspin.

What is inflation?


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Inflation is measured by using a price index.

A price index measures the average change in price of a type of good over time.

The Consumer Price index (CPI) is a price index for a “market basket” od consumer goods and services. Changes in the average prices of these items approximate the change in the cost of living.

Also know as the Cost of living index.

The CPI is determined by consumer and store surveys.

The current prices are compared to a base period. 1982-1984


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Base 100- 1982-1984


The health of the economy what is wrong and what can be done

Inflation Rate

TC

CPI is found by finding the total price of a consistent “market basket”

Item200920102011

Hot Sausage3.004.004.50

Pasta1.001.502.00

Ice Cream3.003.505.00

Eggs1.001.502.00

Milk3.003.004.50

Bread1.001.502.00

Total: 12.0015.0020.00

(Market Basket)


The health of the economy what is wrong and what can be done

Inflation Rate

TC

What is CPI (Consumer Price Index)

Market basket price for year

_____________________________ x 100= CPI

Market basket price for base year

YearMarket BasketBase year 2009 Base year 2010 Base year 2011

200912

201015

201120

100

100

100

Base year is always 100

Example

Market price for 2009

_______________________ x 100 = CPI

Base year 2009

Base year is always 100

Example

12

_______________________ x 100 = 1

12

Now complete the chart


The health of the economy what is wrong and what can be done

Inflation Rate

TC

What is CPI (Consumer Price Index)

Market basket price for year

_____________________________ x 100= CPI

Market basket price for base year

YearMarket BasketBase year 2009 Base year 2010 Base year 2011

2009$ 12

2010$ 15

2011$ 20

80

60%

100 %

75%

125%

100 %

100%

133%

167%

Example:

To find the increase in inflation from 2009 to 2010

15

______ x 100= 125%

12


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Limitations of CPI as a measure:

Substitution Bias- People buy substitutes if prices are too high. CPI doesn’t take this into consideration.

Outlet/Discount store bias- CPI doesn’t take into account that people may buy goods at a discount store.

Acme- average price of a chicken fryer (small whole Chicken)- $7.41

Bottom Dollar – same item or similar item- $4.00

New Product bias

Mobile phones in 1983- $3995, 1998 $200- but mobile phones were not included in the CPI until 1998.

Quality change bias- technological improvements make items better and last longer.


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Inflation scenarios 1. Larry borrowed $5000 from Ronnie in 1955. He pays it back in 2005. Why has inflation benefitted the borrower or in other words why has it hurt the lender?2. Jan is retired and receives a monthly check of $2000 dollars from social security. How will inflation impact her life?3. Sally makes 50,000 dollars in her first year or work and is scheduled to make $51,000 the next year. During that period of time the inflation rate was 4% , has her standard of living improved? 4. In 1960, mark bought a house for $16,000. He made no improvements but sold it in 2013 for $300000, how did this happen?


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Nominal cost of living- the cost in current dollars of the basic good and service that people need.

Real cost living- the nominal cost of basic goods and services, adjusted for inflation

Nominal wages- wages based on current prices

Real wages- nominal wages that have been adjust for inflation.

Wages need to keep up with the cost of living if the standard of living is to remain the same.

The cost of living is indeed going up—in money terms. What really matters, though, isn't what something costs in money; it's what it costs in time. Making money takes time, so when we shop, we're really spending time. The real cost of living isn't measured in dollars and cents but in the hours and minutes we must work to live.

American essayist Henry David Thoreau (1817-62) noted this in his famous book, Walden: "The cost of a thing is the amount of. . .life which is required to be exchanged for it, immediately or in the long run."

http://dallasfed.org/fed/annual/1999p/ar97.cfm


The health of the economy what is wrong and what can be done

Inflation Rate

TC


The health of the economy what is wrong and what can be done

Inflation Rate

TC

In 2010, Sally started her new job making $50,000.

In 2011, Sally earned a $1,000 raise.

From 2010 to 2011 prices have increased 4%.

Should Sally be happy or disappointed? Why?

or

Sally received a 2.0% raise but her purchasing power dropped because inflation increased 4.


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Types of inflations

Creeping inflation- gradual inflation, in the United States the annual rate of inflation is 3.4 percent since 1914. The rate has varied widely but this is on average what we can expect.

Hyperinflation- when inflation goes into overdrive. Prices can double within days, the standard of living collapses.

Germany in the 1920’s

Zimbabwean 2008


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Types of inflations

Deflation- Inflation rate always rises. It either speeds up or slows down. It never drops.

If the rate becomes negative it is call Deflation. Deflation is caused when prices drop over time.

Sounds good for consumers and savers.

Every dollar saved will have an increased purchasing power in the future.

Who does this hurt?

This hurts borrowers- this hurts everybody because if people aren’t borrowing they aren’t investing and this slows down the economy.

Business will slow down production and there will be an decrease in wages and an increase in job cuts.

This is actually a very bad spiral – early days of the great depression saw deflation


The health of the economy what is wrong and what can be done

Inflation Rate

TC

Causes of Inflation

Increase in money supply- too many dollars too few goods

Demand Pull- If the sectors of the economy try to buy more than the economy can produce. The extra demand pulls up prices

Cost-Push- The rising cost of labor, land, or capital pushes up the overall price in future transactions.

Or course a company does not have to extend the cost to the buyer and the companies that don’t get the business. But to do so they will need to make cuts in other places.

Wage-price spiral- higher wages result in higher prices and higher prices result in more people asking for higher wages.


The health of the economy what is wrong and what can be done

Inflation Rate

TC

MV= PQ

M- Money Supply

V- Velocity of Money (how many transactions are made.)

P- Price level

Q- Quantity of goods and services (output)

If the money supply increases and velocity and Quantity produced (output) have stayed the same, then what must happen to price in order for the equation to remain equal?

If the money supply increases at a rate that is higher than the increase in GDP, we will see an increase in price.


The health of the economy what is wrong and what can be done

Inflation Rate

TC

  • Economic cost of inflation

  • Loss of purchasing power

  • If the price of a guitar was $200 one year. A student saved his money for an entire year to buy the guitar. He came back to the store the following year to see that the price is now $220.

  • Hurts those on fixed incomes the most.

  • Wages have to keep up with inflation

  • Higher interest rates- real interest rate is the

  • nominal interest rate- the inflation rate= a real interest rate

  • 10% interest rate- 4% inflation rate= 6 % real interest rate

  • Dollars worth less tomorrow than today- slows lending

  • 3. Loss of efficiency- many economist consider uncertainty about prices to be a bigger problem than the others. Buyers and sellers don’t have enough information to make the most efficient decisions.


The health of the economy what is wrong and what can be done

The Business Cycle

TC

Economies are always changing

There are periods of growth and decline. Booms and Bust

This is the business cycle.

Movie The Business Cycle


The health of the economy what is wrong and what can be done

The Business Cycle

TC


The health of the economy what is wrong and what can be done

The Business Cycle

TC

The name business cycle makes it sound like the cycle is very predictable.

The opposite is true.

Peaks and Trough are extremely difficult to predict.

The leading indicators are GDP, Unemployment, and Inflation.

Other leading indicators:

Housing construction- an increase signals confidence and a decrease slows a lack of confidence and an increase in savings.

Others:

Real GDP

Lagging indicators are indicators that lag behind or happen after contraction or expansion

Unemployment rate


The health of the economy what is wrong and what can be done

The Business Cycle

TC

Other names.

Recession- a decline in GDP lasting 6 months or 2 quarters

Depression- Severe contraction

When GDP grows – there will be inflation and low unemployment- natural

When GDP shrinks- there will be less inflations and higher unemployment- natural

Stagflation – is the worst of both worlds- high unemployment and high inflation- unnatural


The health of the economy what is wrong and what can be done

The Business Cycle

TC

What causes the dip?

Negative shock to the economy- rapidly rising oil prices, stock market crash, uncertainty with regards to government actions, terrorist attacks

Increase in interest rates making it more difficult to borrow money.

When supply is less than demand – natural or man-made

Some say an increase in savings leads to an increase in inventories. Increased inventories force firms to cut back production and layoff workers.

What causes Growth?

Confidence in market caused by knowledge- uncertainty is the worst enemy.

Increased production causes firms to hirm

New technology

Government??????- this is the question that needs to be answered for the unit.


The health of the economy what is wrong and what can be done

TC

Now that we know how to measure the health

The Question is how do we fix the economy?

Just like doctors, economist will have different opinions

Some will say, “Do nothing it needs to run its course.” (Classical)

Other will say, “The Government needs to do something.”

While other may agree with doing “something” that “something” depends on the economist

Keynesians

Monetarist

Classical


The health of the economy what is wrong and what can be done

Fixing the Economy


The health of the economy what is wrong and what can be done

Does fixing the Indicators fix the economy?

Remember . . .

Economics – The allocation of scarce resources that have alternative uses.

Money measures wealth but it is not wealth.

Does adjusting the indicators improve standard of living and increase production?

What is the Government’s Role?

Remember . . .

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

What is unseen is just as important as what is seen!!


The health of the economy what is wrong and what can be done

Video Clips for Presentation

Broken Window Fallacy

Stimulus Hearing

19:00 Economist Against Stimulus Package

45:50 Economist speaking about net gain of Stimulus Package

1 hour 32 min. Economist in favor of the Stimulus Package

Hayek vs Keynes Raps

Round 1- Fear the Boom and Bust

Fight of Century Keynes vs. Hayek Round 2

Deck the Halls with Macro Follies


The health of the economy what is wrong and what can be done

http://econstories.tv/

http://www.econedlink.org/lessons/index.php?lid=593&type=educator


The health of the economy what is wrong and what can be done

Supply and Demand graphs- The Basics

Price

The purpose of this graph is to look at markets. Free Market Price and Quantity

Supply

P e

Demand

Q e

Q


The health of the economy what is wrong and what can be done

The Aggregate Market- The Basics

Long Run Aggregate Supply (LRAS)

Aggregate- all together (total)

Price Level

Measure of Inflation

Aggregate Supply (AS)

The purpose of this graph is to look at countries. Total supply and demand at full employment

P e

AD= Aggregate Demand

AD= GDP= C + I + G + NX

Aggregate Demand (AD)

Q e

G.D.P real

employment

Qy

Qy= Quantity at full employment

You may find it amazing how a graph can be interpreted in so many different ways.

Learning the basics of the graph will provide you an opportunity to learn fiscal and monetary policy in different ways.

The law of demand is the same.

There is an inverse relationship- PL up, AD down, PL down AD up

The law of supply is the same

There is a direct relationship- PL up, AS up, PL down AS down


The health of the economy what is wrong and what can be done

Conflicting Views

Keynesian Views

Classical Views

John M. KeynesMore Government

Macro not Micro

KeynesiansMultiplier

Neo-KeynesiansIncrease Gov’t

Demand-sidersspending!!!!!!!!

Fiscal Policy

F.A. Hayek

Neo-Classical

Austrian

Supply-siders

Real Production= real wealth

Less Government

Equilibrium of market

Increase consumer or Investments

SAVINGS!!!!!

1. Prices and Wages are flexible – markets quickly and efficiently achieve equilibrium. When applied to the resource market full employment is maintained- unemployment is not a long term problem

1. Prices and Wages are Sticky- Prices and wages respond slowly to changes in supply and demand and this results in shortages and surplus- especially with labor.

2. Increase Aggregate Demand to increase GDP- is influenced by a host of economic decisions both public and private.- savings hurt The paradox of thrift

2. Say’s Law- supply creates it own demand- aggregate product of goods and service produces enough income to exactly purchase all output

3. “In the Long Run we are all dead”- care more about Short run and not so much about the long run. Changes in AD have greater short run effect on real GDP and employment but not as much on price. What is true in the short run isn’t always true in the long run

Savings-investment equality-any decrease in output because of savings is offset an increase in the demand for investment

This creates a different market – the money market

Investment is demand

Savings is Supply

Interest rates create equilibrium- Monetarist

4. The multiplier- increases in spending will increase consumption and increase output- which will lead to more spending

5. Steer the Market- advocated stabilization policies such as tax, government spending, laws, and regulation in order to defend against the sudden and unpredictable changes in the business cycle

Individualism

Savings leads to investments, which lead to stronger business, which leads to more supply and more employment

6. The Animal Spirits- believed growth and contraction had much to do with confidence and trust


The health of the economy what is wrong and what can be done

Keynesian’s Paradox of thrift

A Prisoner’s Dilemma for Savings

A Prisoners Dilemma between individuals in a society who want to save.

It is smart to save during the good times , but if everybody saves than Aggregate demand drops and GDP drops now we are in a recession.

How does the government attempt to avoid this?

Save Spend

5, 5

10, 3

Save

Spend

7, 7

3, 10


The health of the economy what is wrong and what can be done

Summary

To Hayek:

Only real savings should lower interest rates, not the Fed. Interest rates drop as private savings increase.

During recession: We will stay at full employment if prices and wages are allowed to be flexible.

To Keynes:

Spending!!!!!!!

During a recession: Only prices and wages will stay (prices and wages are sticky) and employment drops. Government spending during a recession will increase employment, GDP, and AD and will not have an impact on price level until full employment is reached.


The health of the economy what is wrong and what can be done

How to fix the economy? According to . . .

Fiscal Policy

Monetary Policy

Supply Side Policy

Increase Government Spending

Buy Securities from banks or dealers

Cut tax on Business

Reduce Regulation

During a

Recession

With high unemployment

Decrease Taxes

Decrease Discount Rate

Give business a chance to expand and hire

Reduce Reserve requirements

No capital gains tax or marginal (progressive income tax)

All ideas intended to lower interest rate

Sell securities to banks

Decrease Government Spending

Do nothing the market will take care of itself.

Increase Discount Rate

During Expansion

With high inflation

Increase Tax

Increase Reserve Requirements

All ideas intended to increase interest rates


The health of the economy what is wrong and what can be done

AS/AD/LRAS graphs- Classical vs Keynesian models

Labor Market

Wages

(AS)

W e

W 1

(AD)

(AD) 1

Q 1

Q

Employment

Q 2

Classical- believe that when demand for employment decreases- wages will fall and the market will clear (return to equilibrium). Some people will choose not to work but most will eventually lower their wages.

Keynesians- say- no when demand for employment falls- wages and prices are sticky. We simply get a new quantity at the same wage. This creates a surplus of supply of workers which will remain until demand increases.

Quantity demanded is less than the quantity supplied.


The health of the economy what is wrong and what can be done

Aggregate Supply (The classical model)

The whole purpose of these graphs is to find the Price level, GDP, and unemployment

AS is vertical and at the same point of full employment

Classical economist believe that resources prices and wages are flexible

This model says that the government doesn’t need to get involved because the market will fix itself.

(AS) much like the LRAS

P.L.

P e

What will happen to price as AD falls?

P 1

The classical model suggest that the economy fixes itself and that prices and resources price will fall to create a new equilibrium.

(AD)

(AD) 1

Q y

G.D.P real

When Aggregate demand falls what happens to. . .

Price?

Employment?

Wage (remember wages are price)?

GDP real?


The health of the economy what is wrong and what can be done

Aggregate Supply (The classical model)

If there is a decrease in AD

There will be a reduction in price level and higher unemployment

LRAS

P.L.

SRAS

According to classical economist the SRAS will eventually increase as wages decrease and the price of resources decrease

This will give you a new quantity demanded back at full employment

SRAS 1

P e

P 1

(AD)

(AD) 1

This will occur as long as wages can adjust. What can keep wages artificially elevated? Or in other words what can keep the market from clearing?

Q 1

Q y

G.D.P real

Q 2

Whether or not the market will clear will also depend on the worker’s wage expectations.

Unions

Rational Expectations

Workers will revise their expectations instantaneously

Adapted Expectations

It may take workers weeks, months, or years but eventually they will adapt their wage expectations.

Min. Wage laws

Unemployment benefits


The health of the economy what is wrong and what can be done

Aggregate Supply (The Keynesian Model)

LRAS

P.L.

P e

(AD) 1

(AD)

Q y

full

Y1

G.D.P real

According to Keynes, it is possible for the economy to be in a recession permanently. Prices/wages won’t change and output will remain low.

When output is below full employment, the price level doesn’t fall because wages/resource prices don’t fall (wages are sticky)


The health of the economy what is wrong and what can be done

Aggregate Supply (The Keynesian Model)

LRAS

P.L.

P e

(AD) 1

(AD) 2

(AD) 3

(AD) 4

(AD) 5

Q y

full

Y1

G.D.P real

According to Keynes, only with the help of the help of the government can Aggregate demand increase.

Demand side economics- focus on demand

Fiscal approach- government spending and taxation

Monetarist approach is to increase investments

Any aid past Qy- is purely inflationary


The health of the economy what is wrong and what can be done

Aggregate Supply – So what Model is correct?

They Both have some valid points

LRAS

P.L.

Classical

Phase

When in the Classical Phase

The economy is operating at full employment

Any and all increase in AD will result in an increase in price and in increase in inflation

P e

Intermediate

Phase

Keynesian

Phase

AD

AD

AD

Q y

full

G.D.P real

When in the Intermediate Phase

As AD approaches the curve

An increase in AD and decrease in unemployment

Result in a gradual increase of price and some inflationary pressure

When in the Keynesian Phase

Output can increase with no change in price.

No increase in price level, no inflationary pressure, spare room to grow.


The health of the economy what is wrong and what can be done

AS/AD/LRAS graphs- how it works during Expansion

If Aggregate Demand increases

(LRAS)

(AS) 1

P.L.

Both Prices and GDP will increase.

(AS)

C

P 2

In the long run – an increase in price will not lead to an increase in output.

Why?

P 1

B

A

P e

Because as prices increase so does the price of resources including labor, wages, and materials.

(AD) 1

(AD)

Q e

Q 1

G.D.P real

As a result the Aggregate supply will shift to the left (decrease) and we will find ourselves back at full employment.

Qy


The health of the economy what is wrong and what can be done

AS/AD/LRAS graphs- how it works during Recession

If Aggregate Demand decreases.

(LRAS)

P.L.

(AS)

Both Price Level and output will decrease.

(AS 1)

In the long-run a decrease in price will not lead to a decrease in output.

Why?

A

P e

B

P 1

Because as prices decrease so does the price of resources including labor, wages, and materials.

C

P 2

(AD)

(AD) 1

Q e

G.D.P real

Q 1

As a result the Aggregate supply will shift to the right (increase) and we will find ourselves back at full employment.

Qy


The health of the economy what is wrong and what can be done

Inflationary and Recessionary Gaps- Steering the Market

Potential

GDP

Economic

Activity

Inflationary Gap

(Full Employment)

Recessionary Gap

Time (years)

The Government can steer the economy in different ways

Laws and Regulations- stabilizers

Fiscal Policy- changes in government spending or taxation to influence the economy

Monetary policy- changes in monetary supply to influence the interest rates that influence economy


The health of the economy what is wrong and what can be done

AS/AD/LRAS graphs- Inflationary Gap

Actual GDP > Potential GDP

Output is beyond full employment

Price

Level

LRAS

Unemployment very low

Prices very high

AS

Government wants to limit inflation by reducing demand

How do they do it?

P1

P2

AD 1

AD 2

GDP real

Q y

FE

Q1

Gov’t can decrease gov’t spending or increase tax on consumers. AD = C + I + G + NE

Federal Reserve can decrease money supply or increase interest rates. AD = C + I + G + NE

Fiscal Policy:

Monetary Policy:


The health of the economy what is wrong and what can be done

AS/AD/LRAS graphs- Recessionary Gap

Actual GDP < Potential GDP

Output is below full employment

Price

Level

LRAS

High unemployment

Government wants to limit unemployment by increasing demand

AS

P2

How do they do it?

P1

AD 2

AD 1

GDP real

Q y

FE

Q1

Gov’t can increase gov’t spending or decrease tax on consumers. AD = C + I + G + NE

Federal Reserve can increase money supply or decrease interest rates. AD = C + I + G + NE

Fiscal Policy:

Monetary Policy:


The health of the economy what is wrong and what can be done

Summary

Inflationary Gap

Actual GDP > Potential GDPOutput is beyond full employment

Unemployment very low

Prices very high

Government wants to limit inflation by reducing demand

Gov’t can decrease gov’t spending or increase tax on consumers. AD = C + I + G + NE

Federal Reserve can decrease money supply or increase interest rates. AD = C + I + G + NE

Fiscal Policy:

Monetary Policy:


The health of the economy what is wrong and what can be done

Summary

Recessionary Gap

Actual GDP < Potential GDPOutput is below full employment

High unemployment

Government wants to limit unemployment by increasing demand

Gov’t can increase gov’t spending or decrease tax on consumers. AD = C + I + G + NE

Fiscal Policy:

Monetary Policy:

Federal Reserve can increase money supply or decrease interest rates. AD = C + I + G + NE


The health of the economy what is wrong and what can be done

How Much is Too Much?


The health of the economy what is wrong and what can be done

Fiscal Policy (Demand side)

Keynesians and Democrats

Keynesian economics

President sets the budget, Congress develops programs- they can tax and borrow

Commerce clause – etc.

Raising Revenue- Tax or Borrow

Spending- increase of Decrease (discretionary and nondiscretionary)


The health of the economy what is wrong and what can be done

Monetary Policy (Demand side)

Leading advocates- Monetarist

Milton Friedman showed that people’s annual consumption is a

function of their “permanent income,” a term he introduced as a

measure of the average income people expect over a few years.

Monetarist believe that price level depends on money supply

Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect.

Friedman’s solution to the problems of inflation and short-run fluctuations in employment and real GDP was a so-called money-supply rule. If the Federal Reserve Board were required to increase the money supply at the same rate as real GDP increased, he argued, inflation would disappear.

He argued that the Great Depression was caused by the Federal Reserves poor management of money. Most monetarist do not support the idea of using money supply to fix the economy- too much lag

To keep unemployment permanently lower, he said, would require not just a higher, but a permanently accelerating inflation rate – increase with rate of increase of real GDP


The health of the economy what is wrong and what can be done

Inflation Rate

TC

MV= PQ

M- Money Supply

V- Velocity of Money (how many transactions are made.)

P- Price level

Q- Quantity of goods and services (output)

If the money supply increases and velocity and Quantity produced (output) have stayed the same, then what must happen to price in order for the equation to remain equal?

If the money supply increases at a rate that is higher than the increase in GDP, we will see an increase in price.


The health of the economy what is wrong and what can be done

Supply and Demand of Money

Price

Interest Rate

I2

I1

I3

AD

Q

Q1

Q2

Q3

Interest rate at supply

Decreasing the supply of money will increase the interest rate

Increasing the supply of money will decrease the interest rate


The health of the economy what is wrong and what can be done

If we increase the supply of money what will happen to the value of the currency?

Devaluation

In theory what should happen to our net exports?

GDP= C + G + I + NE

In theory they will increase. Why?

Below is a simple example:

If 1 U.S. dollar = 1 Euro how many Euro’s what would a $20,000 American car cost?

In America?In Germany?

If the dollar was devalued so that 1 U.S. dollar = .5 Euros what would a $20,000 American car cost?

In America?In Germany?

In what situation would an American car be more appealing to the German?

In theory why does this not impact the American car manufacturer?


The health of the economy what is wrong and what can be done

Sounds good.

But what is the problem?

Money is not wealth it measures wealth. If there is a devaluation of currency the Federal Reserve is telling people that you have less than you really do.

The car example is only taking into account the final product, what it is not factoring in is the fact that we have a global economy and that the car manufacturer must spend more dollars on imported raw materials.

Not good for global relations, in our example European companies could impose tariffs, devalue their currency, or even have embargos to protect their own car companies.


The health of the economy what is wrong and what can be done

Open Market Operations:

The Fed buys and sells U.S. Treasury securities. Such buying and selling affects the amount of excess reserves that banks have available to make loans and to create money. This is the primary monetary policy tool used by the Fed. If the Fed buys Treasury securities, banks have more reserves which they use to make more loans at lower interest rates and increase the money supply. If the Fed sells Treasury securities, banks have fewer reserves which they use to make fewer loans at higher interest rates and decrease the money supply.

Results:

Reserves increase

Excesses reserves increase

Loans increase

Money Supply increases

Interest rates decrease

More consumer and investment spending

If the Fed. Easy money policy

$$ and Treasury Securities

$$ and Treasury Securities

$$

If the Federal Reserve buys Treasury Securities from banks or market

The banks will have more in their reserves

and they will be able to lead at a lower interest rate


The health of the economy what is wrong and what can be done

Open Market Operations:

The Fed buys and sells U.S. Treasury securities. Such buying and selling affects the amount of excess reserves that banks have available to make loans and to create money. This is the primary monetary policy tool used by the Fed. If the Fed buys Treasury securities, banks have more reserves which they use to make more loans at lower interest rates and increase the money supply. If the Fed sells Treasury securities, banks have fewer reserves which they use to make fewer loans at higher interest rates and decrease the money supply.

Results:

Reserves decrease

Excesses reserves decrease

Loans decrease

Money Supply decreases

Interest rates increase

Less inflation

If the Fed. Tight money policy

$$ and Treasury Securities

$$ and Treasury Securities

$$

If the Federal Reserve sell Treasury Securities to banks or market

The banks will have less in their reserves

and they will have to lead at a higher interest rate


The health of the economy what is wrong and what can be done

Discount Rate:

The Fed can also adjust the interest rate that it charges banks for borrowing reserves. Higher or lower rates affect the amount of excess reserves that banks have available to make loans and create money. If the Fed lowers the discount rate, then banks can borrow more reserves, which they can use to make more loans at lower interest rates, which then increases the money supply. If the Fed raises the discount rate, then banks can borrow fewer reserves, which they use to make fewer loans at higher interest rates, which then decreases the money supply. Changes in the discount rate are most often used as a signal for monetary policy actions.

Easy money policy

3.0%

3.0%

3.0%

3.0%

3.0%

Fed Reserve lowers discount rate (interest rate it charges banks)

Banks Borrow more reserves

There is an increase in the money supply

There is a lower interest rates because banks can compete with other banks

There is an increase in spending by consumers and investors


The health of the economy what is wrong and what can be done

Discount Rate:

The Fed can also adjust the interest rate that it charges banks for borrowing reserves. Higher or lower rates affect the amount of excess reserves that banks have available to make loans and create money. If the Fed lowers the discount rate, then banks can borrow more reserves, which they can use to make more loans at lower interest rates, which then increases the money supply. If the Fed raises the discount rate, then banks can borrow fewer reserves, which they use to make fewer loans at higher interest rates, which then decreases the money supply. Changes in the discount rate are most often used as a signal for monetary policy actions.

Tight money policy

11.0%

11.0%

11.0%

11.0%

11.0%

Fed Reserve increases discount rate (interest rate it charges banks)

Banks Borrow less reserves

There is an decrease in the money supply

There is a higher interest rate

There is an decrease in spending which will slow down inflation


The health of the economy what is wrong and what can be done

Reserve Requirements:

The Fed can further adjust the proportion of reserves that banks must keep to back outstanding deposits (the reserve ratio). Higher and lower rates affect the deposit multiplier and the amount of deposits banks can create with a given amount of reserves. If the Fed lowers reserve requirements, then banks can use existing reserves to make more loans and thus increase the money supply. If the Fed raises reserve requirements, then banks can use existing reserves to fewer more loans and thus decrease the money supply. This tool is seldom used as a means of controlling the money supply.

A depository institution's reserve requirements vary by the dollar amount of net transaction accounts held at that institution. Effective December 30, 2010, institutions with net transactions accounts:

Of less than $10.7 million have no minimum reserve requirement;

Between $10.7 million and $58.8 million must have a liquidity ratio of 3%;

Exceeding $58.8 million must have a liquidity ratio of 10%.


The health of the economy what is wrong and what can be done

Monetary Policy (Demand side)

Who- the Federal Reserve

What- increasing or decreasing the amount of money in circulation

Goal- full employment, stability, and growth

Easy Money Supply- increasing money supply and decreasing interest rates

Open Market Operations- buy securities

Discount Rates- lower discount rate

Reserve Requirements- lessen requirements

Decrease interest rates

Tight Money Supply – decreasing the money supply and increasing interest rates

Open Market operations- sell securities

Discount Rates- increase discount rates

Reserve Requirements- increase requirements


The health of the economy what is wrong and what can be done

Prisoner’s Dilemma between Monetary and Fiscal Policy.

Normally, high expenditures and is a dominate strategy for Congress and tight money for the Fed. When each selects its preferred strategy will be deficit spending with tight money.

It is important that both the Fed and Congress aligned their ideas, but they are independent of each other and have different goals. The goal’s of the Fed can vary but the goals representatives in Congress is the same- get reelected.

If the Fed and Congress oppose follow their dominate strategies they will find themselves in a prisoner’s dilemma- this happen a lot in the 1980’s

Payoffs (Utility) 1-10

1 being least desirable

10 being most desirable

Congress

Low Expenditures

High Expenditures

Tight Money

4, 4

10, 0

The Fed.

Easy Money

0, 10

6, 6


The health of the economy what is wrong and what can be done

Supply-side theory in AS/AD/LRAS

AS 1

LRAS 1

LRAS 2

LRAS 3

AS 2

v

v

v

P 1

P 2

AD

Q1

Q2

Supply side economics

Supports any action by the government that enables business to lower cost, boost efficiency, and competitiveness.

This increases potential output (Increase abundance, decreases price).

Price drops= Increase in demand

Supply creates its own demand

There are a number of methods

Increase labor market flexibility- Lower min. wage, Weaken trade unions, Reduce unemployment benefits

Invest in education

Advancements in technology – lowers production cost and creates new markets

Lower income tax and capital gains tax- eliminate progressive tax (marginal tax rates)

Lower corporate tax rates

Invest in infrastructure

reduce regulations and oversight

Remove barriers of entry (licenses, certs. Etc.)

Eliminate safety nets and allow for profit and loss


The health of the economy what is wrong and what can be done

How to fix the economy? According to . . .

Fiscal Policy

Monetary Policy

Supply Side Policy

Increase Government Spending

Buy Securities from banks or dealers

Cut tax on Business

Reduce Regulation

During a

Recession

With high unemployment

Decrease Taxes

Decrease Discount Rate

Give business a chance to expand and hire

Reduce Reserve requirements

No capital gains tax or marginal (progressive income tax)

All ideas intended to lower interest rate

Sell securities to banks

Decrease Government Spending

Do nothing the market will take care of itself.

Increase Discount Rate

During Expansion

With high inflation

Increase Tax

Increase Reserve Requirements

All ideas intended to increase interest rates


The health of the economy what is wrong and what can be done

The Problem with Lag.

Knowledge lag- knowledge and recognition lag, it takes time to recognize and correctly understand the problem.

Procedure or Action Lag- In the United States our legislative process can take long and there can be many hold ups.

Change or impact Lag- By the time change has taken place or the impacts are felt we may have been past the initial phase of the business cycle


The health of the economy what is wrong and what can be done

Deficit Spending- annually – When the government spends more that it brings in as tax revenue.

Deficits make good politics, why?

It is popular to cut taxes and to increase spending.

How do we pay for the deficit? Borrowing

Debt- Accumulation of Deficits over the years

Surplus- when Revenue exceeds spending (annually)


The health of the economy what is wrong and what can be done

Progressive Tax


The health of the economy what is wrong and what can be done

Laffer Curve


The health of the economy what is wrong and what can be done

Practice Quiz

List the top 3 indicators of economic health

GDP= ______+______+______+_____= GDP

Aggregate Market

A

E

D

C

F

B

  • List and explain 2 ideas of classical economist

  • List and explain 2 ideas of Keynesian economist

  • Draw the AS for classical economist, Keynesian economist, current model

  • Fiscal policy and monetary policy for a recession and inflationary period


  • The health of the economy what is wrong and what can be done

    1.

    GDP potential

    B

    A

    Time


    The health of the economy what is wrong and what can be done

    ClassicalKeynesian

    Increase Government Spending to increase AD

    Saving= investment

    Wage/Price are sticky

    Wage and price are flexible

    Save

    Spend

    Supply creates its own demand

    Multiplier


    The health of the economy what is wrong and what can be done

    Economic

    Activity

    GDP Potential

    (Full Employment)

    GDP real

    A

    Time

    Fiscal Policy

    Expect Outcomes

    GDP

    AD

    Unemployment

    Inflation rate

    Monetary Policy?

    Expect Outcomes

    What Phase on the new

    Keynesian model


    The health of the economy what is wrong and what can be done

    Economic

    Activity

    GDP Potential

    (Full Employment)

    B

    GDP real

    Time

    Fiscal Policy?

    Expect Outcomes:

    GDPIncrease or Decrease

    ADIncrease or Decrease

    UnemploymentIncrease or Decrease

    Inflation rateIncrease or Decrease

    Monetary Policy?

    Expect Outcomes: increase or decrease

    What Phase on the new

    Keynesian model


    The health of the economy what is wrong and what can be done

    Supply-Side

    Idea to increase GDP


    The health of the economy what is wrong and what can be done

    ClassicalKeynesian

    Increase Government Spending to increase AD

    Saving= investment

    Wage/Price are sticky

    Wage and price are flexible

    Save

    Spend

    Supply creates its own demand

    Multiplier


    The health of the economy what is wrong and what can be done

    Economic

    Activity

    GDP Potential

    (Full Employment)

    Recession

    GDP real

    A

    Time

    Fiscal Policy?

    Tax Increase or decrease

    Government Spending ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    GDPIncrease or Decrease

    ADIncrease or Decrease

    UnemploymentIncrease or Decrease

    Inflation rateIncrease or Decrease

    Monetary Policy?

    Money Supply Increase or decrease

    Interest rates ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    What Phase on the new

    Keynesian model


    The health of the economy what is wrong and what can be done

    Economic

    Activity

    GDP Potential

    (Full Employment)

    Expansion

    B

    GDP real

    Time

    Fiscal Policy

    Tax ? Increase or decrease

    Government Spending ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    GDPIncrease or Decrease

    ADIncrease or Decrease

    UnemploymentIncrease or Decrease

    Inflation rateIncrease or Decrease

    Monetary Policy?

    Money Supply ? Increase or decrease

    Interest rates ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    What Phase on the new

    Keynesian model


    The health of the economy what is wrong and what can be done

    Supply-Side

    Idea to increase GDP


    The health of the economy what is wrong and what can be done

    ClassicalKeynesian

    Increase Government Spending to increase AD

    Saving= investment

    Wage/Price are sticky

    Wage and price are flexible

    Save

    Spend

    Supply creates its own demand

    Multiplier


    The health of the economy what is wrong and what can be done

    Economic

    Activity

    GDP Potential

    (Full Employment)

    Recession

    GDP real

    A

    Time

    Fiscal Policy?

    Tax Increase or decrease

    Government Spending ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    GDPIncrease or Decrease

    ADIncrease or Decrease

    UnemploymentIncrease or Decrease

    Inflation rateIncrease or Decrease

    Monetary Policy?

    Money Supply Increase or decrease

    Interest rates ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    What Phase on the new

    Keynesian model


    The health of the economy what is wrong and what can be done

    Economic

    Activity

    GDP Potential

    (Full Employment)

    Expansion

    B

    GDP real

    Time

    Fiscal Policy

    Tax ? Increase or decrease

    Government Spending ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    GDPIncrease or Decrease

    ADIncrease or Decrease

    UnemploymentIncrease or Decrease

    Inflation rateIncrease or Decrease

    Monetary Policy?

    Money Supply ? Increase or decrease

    Interest rates ? Increase or decrease

    Expect Outcomes: increase or decrease

    CGI

    What Phase on the new

    Keynesian model


    The health of the economy what is wrong and what can be done

    Supply-Side

    Idea to increase GDP


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