Notes for Economics

Chapter 12 - Macroeconomic Policies

Three policy options are available:

• Fiscal Policy - in which the president and congress manipulate federal spending and tax laws.

• Monetary Policy - in which the federal reserve manipulate the money supply and interest rates.

• Supply-Side Policy - in which the president and congress manipulate government regulations, incentive programs, and tax laws.

Fiscal Policy:

• "Fiscal" refers to the federal budget.

• The budget consists of spending (G) and tax revenues (T).

• Fiscal policy can increase G or decrease T to cause an increase in total spending.

• Fiscal policy can decrease G or increase T to cause a decrease in total spending.

Budget Deficit:

A budget deficit occurs when G>T, that is, spending exceeds tax receipts.

The government must borrow to pay the bills.

• Added borrowing increases the already huge national debt.

• If the government increases borrowing there is les available funds for the private sector to borrow. This is "crowding out."

Fiscal Policy for an Underperforming Economy:

• Unemployment is the main problem.

• Solution: Jumpstart the economy by either increasing G or decreasing T, or both.

• This generates a type (1) movement on the macro model. AD shifts to the right.

• It also triggers the multiplier effect.

• This action will increase the budget deficit.

*See figure 12-1*

Fiscal Policy for an Overheated Economy:

• Inflation is the main problem.

• Solution: Jumpstart the economy by either decreasing G or increasing T, or both.

• This generates a type (2) movement on the macro model. AD shifts to the left.

• It also triggers the multiplier effect.

• This action will decrease the budget deficit.

*See figure 12-2*

Problems with Fiscal Policy:

There are several time lags in devising and implementing the policy.

Politics will cause arguments on how to implement.

• Those who favor big government will want to increase G to fight unemployment and increase T...