how much obligation does the government have to keep the economy running smoothly?

ECONOMICS LESSON #9GOVERNMENT INTERVENTION

Fiscal, Monetary, and Supply-Side policies

Guiding question:

How much obligation does the government have to keep the economy running smoothly?

MONEY!

What is it? What is GOOD money? Widely accepted Portable Divisible Holds its value

Who controls the money supply?

The Federal Reserve Bank, or “Fed” controls monetary policy

How much money is out there How high interest rates are

“Hitler teaches monetary policy” video

How does lowering interest rates boost the economy?

Lower interest rates makes it easier for businesses and consumers to borrow money, so

Businesses build more factories and stores and hire more people

Consumers buy more cars and homes and refrigerators, etc. , creating more jobs

Unemployment goes down, income and profits go up; everybody’s happy!

Why might lower interest rates NOT help the economy during recession? 

EXPECTATIONS. If consumers and businesses EXPECT the economy to stay weak, they’re not going to expand their businesses or make major purchases no matter how low interest rates are.

“You can lead a horse to water, but you can’t make him drink”

FISCAL POLICY

Changes in government spending and taxes, in order to affect the economy

What are the two ways to pay for more govt. spending?

Increase taxes

But people don’t like that, so politicians rarely do that

Besides, if the government adds money to the economy by spending more, and then takes away by taxing more, there is no net gain.

So, yeah – that’s generally not gonna work

Borrow the money!

Spend now, pay later! It’s the American way!

The cost is less obvious to people Who ends up paying? (Hint: What’s

happening to the cost of college, and your overall future prospects?

What is the main problem with demand-side (monetary & fiscal) policies?

What does the Phillips Curve have to do with that?

Why might Supply-Side policies work better?

So – how can we increase the aggregate supply?

Tax cuts Deregulation Subsidies Training & education Research & development Privatization Improve infrastructure Reduce unemployment benefits Free trade

The good news:Overall, they work pretty well !

More jobs, more profits, and lower prices!

“Supply-side policies have delivered the closest thing to a free lunch I have seen in my 25 years in this business” – Robert Lucas, Nobel Prize winner in Economics, 1995

A picture’s worth 1000 words!(but is a geek still worth 1000 nerds?)

The bad news: Some social costs, such as

Higher income inequality Less consumer protection Fewer services for low-income people Plus, many policies take a long time to

work (but then so do many demand side policies)

FREAKANOMICS???