The document discusses fiscal policy and how it can be used to influence the economy. It explains that John Maynard Keynes theorized that the government should get involved in the economy through taxing and spending policies. During recessions, the government can stimulate the economy by increasing spending or cutting taxes. This puts "money in people's pockets" and leads to recovery. The Great Depression changed traditional laissez-faire economic thinking by showing the economy does not always self-correct, necessitating a more active government role through Keynesian fiscal policies.

1. What would you do with an
unexpected $1,000 tax return?
Most people would spend at least part of it

2. What would you do if you owed
an extra $1,000 in taxes?
People would reduce their consumption
spending & save money to pay it

3. Fiscal Policy
the deliberate use of taxes and spending to
influence the economy (speed it up or
slow it down)
“Stimulus” money

4. For many years, people
believed in classical economics
• laissez-faire = let things be
• supply and demand takes care of
everything (remember the “invisible hand”
theory proposed by Adam Smith)
• recessions and depressions would work
themselves out
When did this change?

5. 1930’s Great Depression
changed everything
Unemployment was
25% in 1933 and
never dropped below
14% the rest of the
decade. . .the
economy was not
taking care of itself!
Recall: What is the
unemployment %
today?

6. John Maynard Keynes
British scholar who theorized that:
• government should get involved
• gov’t can control taxing and spending
• the extremes of the business cycle could be
eliminated
His ideas are called Keynesian economics

7. Fiscal policy during recession
• Either increase gov’t spending or cut taxes
– spending more on gov’t projects means more
jobs
– cutting taxes for individuals means more
money for people to spend; cutting taxes for
businesses means more capital investments
or hiring more people

8. Fiscal policy during recession (cont.)
• With tax cuts & stimulus spending,
recovery will occur
• This is called “Stepping on the gas”

9. Fiscal policy to prevent inflation
• Gov’t should decrease gov’t spending or
raise taxes
– (Opposite effects from the last slide of notes)
• This will slow economy down, and slow
inflation
• This is called “Stepping on the brakes”
Online open note quiz

10. Fiscal policy to prevent inflation
• Gov’t should decrease gov’t spending or
raise taxes
– (Opposite effects from the last slide of notes)
• This will slow economy down, and slow
inflation
• This is called “Stepping on the brakes”
Online open note quiz