Suppose your school just received a grant of $2,000,000. The money can be used for anything the school needs. For example, you might consider the following: new teachers bonuses for outstanding teachers new computers new sports equipment college scholarships for graduates replacement of old band instruments Thinking about Gavit, how might you recommend using the money? As a group write a list of your ideas, including how much you would spend on each item you support. Then, explain your list in a brief statement Now lets look at it from the opposite side, suppose your school is $2,000,000 in debt. They need to make up the money this year to remain operational. How would you recommend making up the money? fire some staff decrease salaries have teachers teach more classes cut back on resources any other ways you could think of? As a group write a list of your ideas, including how much money you think you could get from each decision. Then, explain your list in a brief statement Fiscal policy: The use of government spending & revenue collection to influence the economy Monetary Policy: The actions that the Federal Reserve System takes to influence the level of real GDP and the rate of inflation in an economy These are the two ways the government & central bank control the economy. The federal government takes in and spends lots of money (It spends an average of about 10 billion per day) Government needs to decide how much to spend & how much to tax. These two important fiscal policy decisions are made each year when it creates the federal budget. Federal budget: a written document estimating the federal governments revenue & authorizing its spending for the coming year. Lists expected income Shows how the money will be spent The budget reflects priorities Government requires a new budget for each fiscal year (October 1-September 30) Expansionary policy: fiscal policy that tries to increase output Contractionary policy: fiscal policy that tries to decrease output Expansionary Fiscal policy Helps speed up the economy, or increase economic growth Contractionary Fiscal Policy Helps slow down the economy, or slow economic growth Used to prevent a recession or move out of a recession Government can increase spending (buy more g&s) cut taxes or both This raises output & creates jobs (increases demand, causes prices to rise, encourages producers to produce more, need to hire more workers) Expansionary Fiscal policy Helps speed up the economy, or increase economic growth Sometimes government needs to slow down the economy, fight inflation & rapid increase in prices (i.e. if demand exceeds supply) Government can decrease spending raise taxes or both (decreases demand, causes prices to fall, encourages producers to produce less & possibly fire some workers) Contractionary Fiscal Policy Helps slow down the economy, or slow economic growth Entitlements Over half of the federal budget is set aside for entitlements (Social Security, Medicaid, etc.) Knowing the future Delayed results Changes take time Political pressure Coordinating fiscal policy If fed is pursuing contractionary policy, states & local governments (ideally) need to as well Classical Economics Great Depression, clear that millions needed help, but who should provide it? Today were used to the idea that government spends money to stimulate the economy, but in the 1930s, it was a radical idea Classical Economics: a school of thought based on the idea that free markets regulate themselves The Great Depression challenged classical theory Prices fell so demand should ____________ The Great Depression challenged classical theory Prices fell so demand should increase But, demand also fell because __________ _______________________________________ The Great Depression challenged classical theory Prices fell so demand should increase But, demand also fell because people lost their jobs & savings This showed the problem with classical economics; It doesnt address how long it takes for the market to return to equilibrium Just need to wait for it to reestablish in the long run In the long run we are all dead. - John Maynard Keynes In the long run we are all dead. - John Maynard Keynes What is John Maynard Keynes saying with this quote? How do you think Keynes feels about classical economics? What economic policies do you think Keynesian economics support? What is John Maynard Keynes saying with this quote? How do you think Keynes feels about classical economics? What economic policies do you think Keynesian economics support? Answer each question in full sentences. On a poster compare and contrast Adam Smith & John Maynard Keynes. Provide a brief biography of each man. What did each contribute to the field of economics? How are they similar? How are they different? Which do you support more, Classical or Keynesian Economics? Why? Be sure to include some drawings/pictures Neatness & effort count! This project is due Monday 12/7. It is worth 50 points. 10 points 5 points 5 points each 5 points Keynesian economics supports demand- side economics Demand drives the economy To end the Great Depression, who could spend enough to spur demand and revitalize production? Great Depression Hoover ( ): Classical FDR ( ): Keynesian WWII Fully tested Keynesian economics Govt spending increased dramatically US economy was pulled out of the depression Boosted output & reduced unemployment but not without costs Until FDR, US govt balanced the budget Tried not to spend more than they took in The New Deal & WWII spending entered the US into a deficit spending : expenditures exceeded revenues Financial and opportunity cost when borrowing money During WWII, the highest federal income tax rate ever was used Keynesian fiscal policy in the 1970s lead to unemployment and inflation rates soaring Ronald Reagan ( ) Anti-Keynesian Didnt believe we should spend our way out of recession Tax cuts & increased defense spending deficit The next few presidents spend more & more money Supply of goods drives the economy The Great Recession (late 2008) Financial institutions failed Credit was hard to get Spending dropped Unemployment rose International problem Barack Obama elected president in 2008 Promised to stimulate the economy $840 billion stimulus package Contracts, grants, infrastructure projects, education loans, tax cuts Did it work? The basic tool of fiscal policy is the federal budget A balanced budget is when revenue (taxes) = expenditures (spending programs) Budget surplus: any year when revenues exceed expenditures Budget deficits: expenditures exceed revenue When the government spends more than it takes in, there are two basic ways to deal with the deficit 1. Create money 2. Borrow money Typically borrow money by selling bonds US Savings Bonds (EE Bonds) EE earn fixed (same) interest for 30 years Currently 0.10% Treasury Bills Short term bonds that have maturity dates of 26 weeks or less Treasury Notes Have terms of 2 to 10 years Treasury Bonds Mature 30 years after issue Just like people, the government can go into debt National debt: total amount of money the federal government owes to bondholders It is owed to people who hold Treasury bonds, bills, & notes etc. Among the safest investments in the world They can borrow at lower rate since theyre trustworthy Deficit is amount of money the government borrows for one budget, one fiscal year Debt is the sum of all government borrowing before that time minus the borrowings that have been repaid (Deficits add to it, surpluses subtract) 13/weekinreview/deficits-graphic.html?_r=1&13/weekinreview/deficits-graphic.html?_r=1& Use the online simulation to make your own budget. When you are finished, write down the choice you made with a brief explanation of why you chose what you did. The actions that the Federal Reserve System takes to influence the level of real GDP & the rate of inflation in a country The US Department of the Treasury manufactures money in the form of currency The Fed puts the money into circulation Money Creation Money creation isnt always printing new bills You deposit $1000 into a checking account, it is then counted in M1 So money supply increased by $1000 Banks can lend depending on the required reserve ratio (RRR): fraction of deposits banks are required to keep Total amount of money people can gain access too & spend readily Formula used to determine how much new money can be created with each demand deposit & added to the money supply Increase in money supply = Initial cash deposit x 1/RRR Ex. If RRR is 10% 1000 x (1/.10) = 10,000 increase in money supply 1. Reserve Requirements Decrease it expands the money supply Increase itcontracts the money supply 2. The Discount Rate The interest rate the Fed charges on loans to financial institutions 3. Open Market Operations Buying & selling of government securities Securities: financial documents (ex. stocks or bonds) that represents ownership or a promise to pay from the government