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GDP
•THE MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED
WITHIN A NATION IN A GIVEN TIME
NOMINAL GDP
• THE PRICE LEVELS FOR THE YEAR IN WHICH GDP WAS
MEASURED • (IF PRICES NEVER CHANGED,
NOMINAL GDP WOULD BE SUFFICIENT)
REAL GDP
•NOMINAL GDP ADJUSTED FOR
CHANGES IN PRICES (TAKES INTO ACCOUNT
INFLATION)
PER CAPITA GDP
•REAL GDP DIVIDED BY POPULATION
What is a business cycle?A SERIES OF PERIODS OF EXPANDING AND CONTRACTING ECONOMIC ACTIVITY
How is the business cycle measured?AN INCREASE OR DECREASE IN REAL GDP
The expansion stage of the business cycle is a period of
ECONOMIC GROWTH, or an increase in the GDP. JOBS are usually easy to find so UNEMPLOYMENT goes down.
More RESOURCES are needed to keep up with spending DEMAND. The PEAK is the point at which GDP is the highest. As prices RISE and RESOURCES tighten, businesses become less PRODUCTIVE.
After the peak begins the CONTRACTIONphase. What happens during this phase?
THIS IS THE POINT OF THE BUSINESS CYCLE WHERE REAL GDP FALLS AND PRODUCERS CUT BACK
BUSINESS CYCLES (Know the actual cycle)
• SERIES OF GROWING AND SHRINKING PERIODS OF
ECONOMIC ACTIVITY MEASURED BY INCREASES OR
DECREASES IN REAL GDP
A. EXPANSION PHASE-REAL GDP GROWS
RAPIDLYB. THE PEAK-GDP
REACHES HIGHEST POINT
C. CONTRACTION PHASE-REAL GDP
DECLINESD. THE TROUGH-
MARKS THE END OF CONTRACTION
A
B C
D
RECESSION-CONTRACTION LASTING
TWO OR MORE QUARTERS
DEPRESSION-EXTENDED PERIOD OF HIGH UNEMPLOYMENT AND LIMITED BUSINESS
ACTIVITY
STAGFLATION-PERIOD OF INFLATION
AND STAGNANT BUSINESS
The final phase is TROUGH. This is the point where both REAL GDP and EMPLOYMENT stop declining. The cycle is done when:IT HAS GONE THROUGH ALL FOUR PHASES
GREAT DEPRESSION
•WORST CONTRACTION ©-RECESSION) EVER IN
AMERICAN HISTORY
Fiscal Policy
*The government has three roles in the economy:
TAXATION,SPENDING,
& REGULATION
Historically…Initially, the US government started with a _________________________
approach to business. However, after the
______________________________________, it was clear that the economy
needed some guidance.
LAISSEZ FAIRE
GREAT DEPRESSION
http://cache.gawkerassets.com/assets/images/8/2011/11/add1ce9116d1320399c40975b92de5c3.jpg ; 11/22/2011.
So..After _______________, the government decided they needed to take a
_________________________ in the economy to regulate:
• UNEMPLOYMENT•BUSINESS CYCLES•INFLATION•COST OF MONEY
WWII
PROACTIVE ROLE
www.members.fortunecity.com ; 11/22/2011.
DISCRETIONARY FISCAL POLICY:Actions taken by the government by choice to correct economic instability; Congress must enact legislation in order for these policies to be implemented. (Similar to discretionary spending)
EXPANSIONARY FISCAL POLICY:Plan to increase aggregate demand and stimulate a weak economy
CONTRACTIONARY FISCAL POLICY:
Plan to reduce aggregate demand and slow down an inflationary (too-rapidly expanding) economy
AUTOMATIC STABILIZERS:Features of fiscal policy that work automatically to stabilize the economy
PUBLIC TRANSFER PAYMENTS
PROGRESSIVE INCOME TAXES
As income increases, so do taxes allowing it to be an automatic stabilizer
Unemployment compensation, food stamps, welfare, etc.; when people receive these benefits, they gain income to spend so that recession is less severe on the individual/family. In a weak economy, more people qualify for these benefits; in a strong economy, less qualify
Federal Budget
Automatic Stabi-lizersDiscretionary Spending
Discretionary spending is what the President and Congress have choice in how
to spend.
LIMITATIONS OF FISCAL POLICY:1. It follows economic conditions and passing legislation takes
time.2. It should follow the business cycle to balance out peaks and
troughs, but it is tough to predict.3. Rational Expectation Theory-people and businesses expect
fiscal policy to have certain outcomes. When they react to protect their interests, they may limit the effectiveness of the policy.
4. Political issues. (Council of Economic Advisers-advises president on fiscal policy, but they do not always follow because of political pressure.)
5. Regional issues.
DEMAND-SIDE ECONOMICS:FISCAL POLICY TO STIMULATE AGGREGATE
DEMAND– KEYNESIAN ECONOMICS
What was Keynes first
revolutionary idea?
He defined AGGREGATE DEMAND as the sum of investment,
consumer spending, government spending, and net exports.
Keynes advocated increased government spending and
decreased taxation to end recessions.
INCREASED GOVERNMENT
SPENDING
CREATES JOBS
INCREASES INCOME
Keynes advocated increased government spending and
decreased taxation to end recessions.
DECREASED TAXATION
CONSUMERS SPEND MORE
BUSINESSES INVEST MORE
During periods of STAGFLATION
(slow economic growth with high unemployment and inflation)
demand-side policies seem to be INEFFECTIVE
SUPPLY-SIDE FISCAL POLICY:Focuses on LOWERING TAXES ON PRODUCERS
cutting the cost of production to encourage producers to supply more.
SUPPLY-SIDE ECONOMISTS FAVOR:•CUTTING TAXES ON INDIVIDUAL AND CORPORATE INCOME
•CUTTING IN THE HIGHER TAX BRACKETS GIVES MORE MONEY TO THOSE MOST LIKELY TO INVEST IN BUSINESS
•SPENDING CUTS-THE LESS THE GOVERNMENT SPENDSTHE LESS TAXES NEED TO BE COLLECTED
•DECREASE GOVERNMENT REGULATION BECAUSE THESE ADDTO THE COSTS OF PRODUCTION
SUPPLY-SIDE
Cut corporate taxes
Lower production costs
More $ for hiring workers
More supply is made
But, more people have $ to spend
and demand goes up
Businesses make $ due to increased
demand
Laffer Curve
Illustrates how tax cuts affect tax revenues and economic growth.Tax revenues increase as tax rates increase to a certain point.
After that point, higher taxes actually lead to decrease tax revenue.WHY?
Too high of taxes could actually discourage people from working, investing, and spending.
PROVING LAFFER’S THEORY:Legislation passed in the 1980’s
CUT federal income tax rates substantially (top tax bracket from 70% to around
30%), however revenue collected from income tax
INCREASEDabout 13%.
DISPROVING LAFFER’S THEORY:1. With lower taxes people should work
more as some did. However, some found they brought home the same
amount of income from before the tax cuts by working less.
2. Lower tax rates should increase savings and investments, but savings declined
during the 1980’s.
What is a budget deficit?WHEN A GOVERNMENT SPENDS MORE THAN IT TAKES IN
What is deficit spending?WHEN A GOVERNMENT SPENDS MORE THAN IT COLLECTS IN A SPECIFIC BUDGET YEAR
What is a budget surplus?WHEN A GOVERNMENT TAKES IN MORE THAN THEY SPEND
Why does a government issue bonds?
BECAUSE THEY ARE BORROWING MONEY TO FILL A BUDGET GAP; THEY NEED TO PAY THIS MONEY BACK AT A FUTURE DATE