Monetary and fiscal policy notes and debat directions


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This one still needs work, but here is the basis for our mini-unit on fiscal and monetary policy.

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Monetary and fiscal policy notes and debat directions

  1. 1. Monetary and Fiscal Policy<br />Honors Current Issues<br />
  2. 2. Classical vs Keynesian Econ<br />Classical Econ theory<br />Prices rise – we buy less (demand goes down) – surpluses – prices drop – we buy more.<br />When we buy less, businesses lay off workers – less people with jobs – less buying – recession or depression.<br />Eventually, businesses drop prices to point where people buy stuff – businesses make $ - businesses hire more workers – workers spend $ - Depression over<br />
  3. 3. Classical System, <br />Government had no role in management of the economy – “Laissez-faire” or “do nothing”<br />If the economy faces an inflationary gap (equilibrium at a level higher than full employment), Government must reduce demand by spending less; raise taxes; increase interest rates; reducing welfare<br />
  4. 4. Fiscal Policy<br />“How to Spend and Tax Our Money”<br />
  5. 5. Keynesian Economics: “Demand Side Economics”<br />John Maynard Keynes (early 1900s)<br />Economies are unstable and always changing<br />Inflation caused by DEMAND – Too many $ trying to buy too few goods<br />Economies will NOT balance themselves out in a timely manner<br />Too many people will get hurt waiting for the economy to adjust to imbalance in Supply & Demand<br />Government must step in to correct the inherent instability of the economy<br />
  6. 6. Fiscal Policy (Keynes view)<br />In a recession (not enough spending) Government must increase demand by spending more; lowering taxes; lowering interest rates; increasing welfare<br />Examples: FDR’s New Deal programs, Bush/Obama’s “Stimulus Package”<br />“Deficit Spending” is good<br />When in debt, govt should SPEND money and tax less to get out of debt<br />Explain how this works.<br />
  7. 7. Supply Side Economics<br />Believes inflation caused by lack of supply<br />Tax less ANDcut Government Spending<br />“Trickle Down Economics”<br />E.g. Ronald Reagan in 1980s (“Reaganomics”)<br />
  8. 8. Monetary Policy<br />How to regulate the AMOUNT of Money we have<br />
  9. 9. Monetary Policy (Milton Friedman and the Chicago School)<br />Control HOW MUCH MONEY is allowed into the economy<br />Less $ in economy (supply) = more VALUE each $ has<br />More $ put into economy = less VALUE each $ has<br />Can help regulate inflation / deflation of economy<br />Done through the FEDERAL RESERVE BANK system<br />
  10. 10. “THE FED”<br />Federal Reserve Bank<br />Bank of the govt of the US<br />Can control $ supply& interest rates<br />(theoretically) may control inflation rate.<br />Fed Chairman:<br />Ben Bernake<br />
  11. 11. How the Fed Effects Economy<br />Loans $ to all other banks in US<br />Establishes interest rates (the “discount rate”) those banks must pay to the Fed<br />Banks then raise or lower interest rates on loans to you, me and businesses<br />Banks borrow more when interest rates are low – thus have more $ to lend<br />Banks borrow less when interest rates are high – thus have less $ to lend<br />Sell bonds (like an IOU with interest) to banks in exchange for $.<br />Banks have less $ on hand so can not loan as much $ - discourages borrowing<br />Buy bonds back from banks<br />Banks gain $ so can loan more $ to you and me – encourages borrowing<br />Can require banks to keep more or less $ in reserve and not available to loan out<br />
  12. 12. The Fed at work (in theory)<br />Fed raises interest rates to banks<br />MasterCard (owned by Bank of America) then raises ITS interest rate to you. <br />Less demand<br />You then spend less. <br /><ul><li>This lowers prices</li></ul>(less $ in circulation) <br />which helps fight inflation<br />
  13. 13. For Homework<br />For Homework – You are the president’s Economic Advisor. Pick an Economic Policy (Demand Side; Supply Side; Monetary) and explain WHY this concept would help get the nation out of its current economic slump. Be sure to address the problems with the OTHER arguments. Be ready to debate this in class. Be able to explain and teach it in simple terms. <br />(Remember, the American public generally understands things presented to them at no more than a 6th grade level)<br />Use historical examples as well to help back up your point<br />DUE__________________________<br />Essay format.<br />Spelling, grammar, style, punctuation, sentence structure, paragraph organization structure all count towards grade.<br />Write it like you will in college.<br />
  14. 14. The Debate<br />You are a member of an economic think tank:<br />Either the “American Association of Economic Advisors” or the “National Committee for Economic Growth” or the “Association of Classical Economics”<br />You are to testify before Congress on a plan to spur the US economy out of its current slump<br />AAEA believes in Keynesian fiscal policy<br />NCEA believes in Supply Side fiscal policy<br />ACE believes in Classical Economics as best fiscal policy<br />All sides may argue use of monetary policy as well<br />OBJ: Get Congress to approve your plan to save the American economy<br />
  15. 15. Roles<br />2 Economics Professors – teach us about how your fiscal policy works<br />2 History Professors – teach us about previous uses of your fiscal policy<br />2 “Attack Dogs” – attack the viability of other fiscal policies<br />6 students per group x 3 groups = 18 students<br />Congressional Committee consists of 5 students<br />One member is chairman<br />Visual / Teaching Aids of some sort are required<br />May cite news sources from past 2 years to get personal stories of Americans<br />Each team gets 12 to 15 minutes to make its caseFOR its policy<br />Other two teams each get 5- 7 minutes to attack the policy<br />Committee will meet over the course of three days in ___________________<br />Councils have _______ days to conduct research <br />
  16. 16. Some graphs to help you think<br />