NATIONAL ECONOMIC POLICY GOALSSustained economic growth as measured
by gross domestic product (GDP)GDP is total amount of goods and services
produced in the US each yearLow inflationFull employment
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 = % unemployedEstimate is low - “discouraged workers”
not included
INFLATION
Defined as the sustained rise in pricesMeasured by the Consumer Price Index
(CPI)Inflation reduces purchasing power of
consumersComparing real GDP between years
means accounting for inflation (GDP deflator)
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 depressionTop of the business cycle is peakBottom recession called trough
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
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
STIMULATORY FISCAL POLICY
Goal is to increase employment and GDP during a recession
increase government spendingTax cuts also stimulates consumer
spending and business investmentConsumption up + Business Investment
up + Government up +NX = GDP up
CONTRACTIONARY FISCAL POLICYDesigned to bring inflation downGovernment spending decreasesTax increases
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.
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
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.
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
MONEY SUPPLY
Total amount of money circulating in the economy
Money supply is determined by the federal reserve banks
“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
“TIGHT” MONEY
Federal Reserve can try to slow down inflation by:
1. Raising reserve rate2. Raising rediscount rate3. Selling bonds, which takes money out of
the private economy
TIME LAG PROBLEM IN ECONOMIC POLICYThe 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.
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
Social Security
Passed during Depression to create a pension for all Americans
6.2 % of incomeNot a fund, current workers pay for retiring
workersRatio of retiress to workers rising,
therefore long term not enough to cover retirees
Solutions to Social Security
Increase social security taxGet rid of income cap on taxesIncrease age of beneficiariesPrivatize social security to make IRAIncrease immigration to increase
percentage of current workers to retirees
World trade
US imports 14% of GDPExports 12% of GDPLast 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.
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.