Chapter 17- Domestic Policy. (1). Outline the various economic theories proposed for managing the economy. (2). Contrast fiscal policy and monetary policy , and explain the key role of “ the Fed .” (3). Assess Government's ability to manage the economy in view of the Lucas critique .
An economic theory, dominant at the start of the twentieth century, that argued that the federal government's only role in the economy was to ensure a stable supply of money.
What kind of Government economic policy uses spending to spur $$$?
Using the federal government's control over taxes and spending to influence the condition of the national economy.
An economic theory, based on the work of British economist John Maynard Keynes, that contends that the national government can manage the economy by running budget surpluses and budget deficits.
A measure of a country's total economic output in any given year.
Government should spend to raise demand & thus spur economy
Okay to run a budget deficit
Government should cut spending to controlinflation (How?)
Raise taxes to take $$ out of economy
This will cut demand & slow economy downApplication of Keynesian Economics
Examine Recessioncycle in greater detail*
Because businesses can’t sell goods, they fire workers and produce less
Supply and demand for goods and services fall
Because people have less money, they buy less
Unemployment rises and the overall GDP falls
U.S. income distribution as a percentage of income earned
Wealth: income, real estate, stocks, bonds, and material goods.
Top 20% ($1.8K+)
Top 1% ($2.3M+)
Control 80% of all wealth in the United States
Control 40% of all wealth in United States
An economic theory that argues that if the government cuts taxes, reduces spending, and eliminates regulations, resources will be freed up to fuel the economy to produce even more goods and services.
The government selects an industry that it thinks can be a world leader and spur on the economyIndustrial Policy*
R & D Funds
Any downside to this approach?
So what areas exactly does the EPA regulate?
Any problem* with Government regulations to protect the environment?
Market Incentives &
Command and Control
Debate & great conflict over environmental policy to continue
What isSocial Welfare Policy?
Government programs that provide goods and servicesto citizens to improve the quality of their lives.
If given an example, can you ID the proper strategy?!
Social Security Act of 1935*
What’s the difference between the two?
*A social insurance program that provides basic hospital insurance and supplementary insurance for doctors' bills and other health care expenses for people over the age of 65 or older
**A public assistance program that provides publicly subsidized health care to
Distribution of Social Welfare Expenditures Across Programs
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
Impact of Baby Bommers
Who pays the costs of the uninsured?