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1. Draw an Inflationary Gap. LRAS Graph 2.Draw a Recessionary Gap. LRAS Graph3.Draw the “creative process”
Near Pod Review
Stabilizing the EconomyThe Government has
two different tool boxes it can use:
1. Fiscal Policy-Actions by Congress to
stabilize the economy.OR
2. Monetary Policy-Actions by the
Federal Reserve Bank to stabilize the
economy.
Taxes & Government SpendingØMost of the $3.7 trillion the government
receives each year is already spent.ØAfter they fulfill their legal obligations, only
about 40% of the money is left.
Let me tell you how it will beThere's one for you, nineteen for me
Cos I'm the taxman, yeah, I'm the taxman
“Taxman” written by George Harrison
Off the Beatles Revolver album 1966
2 Types of Fiscal SpendingMandatory Spending:AKA: Automatic StabilizersØ Permanent spending or
taxation laws enacted to work counter cyclically to stabilize the economy
Ex: Welfare, Unemployment, Min. Wage, etc.Ø When there is high
unemployment, unemployment benefits to citizens increase consumer spending.
Discretionary Spending:Ø Congress creates a new
bill that is designed to change AD through government spending or taxation.
Ex: In a recession, Congress increase spending.
Taxes & Government SpendingEach year mandatory spending accounts over 60 percent of the federal budget. The two largest mandatory spending programs are Medicare and Social Security, which together account for over 40 percent of the federal budget.
*Almost half the budget it taken up by old people
40%MedicareSocial Security
Close a Inflationary Gap by decreasing GDP Ø Decrease Government
SpendingØ Increase TaxesØ Combination of both
Fiscal Policy
Close a Recessionary Gapby increasing GDPØ Increase Government
SpendingØ Decrease TaxesØ Combination of both
ExpansionaryContractionary