Professional Documents
Culture Documents
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Draw and Practice
Congress uses discretionary fiscal policy to the
manipulate the following economy (MPC = .9)
AD1 AD
-$5 Billion
$50FE $100
US Debt Clock
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Explain this cartoon
2003
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Who ultimately pays for excessive
government spending?
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Video:
Government Stages Coup
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Additional Problems with Fiscal Policy
1. Problems of Timing
• Recognition Lag- Congress must react to
economic indicators before it’s too late
• Administrative Lag- Congress takes time to
pass legislation
• Operational Lag- Spending/planning takes time
to organize and execute ( changing taxing is
quicker)
2. Politically Motivated Policies
• Politicians may use economically inappropriate
policies to get reelected.
• Ex: A senator promises more welfare and public
works programs when there is already an
inflationary gap.
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Additional Problems with Fiscal Policy
3. Crowding-Out Effect
• In basketball, what is “Boxing Out”?
• Government spending might cause unintended
effects that weaken the impact of the policy.
Example:
• We have a recessionary gap
• Government creates new public library. (AD increases)
• Now but consumer spend less on books (AD decreases)
Another Example:
• The government increases spending but must borrow
the money (AD increases)
• This increases the price for money (the interest rate).
• Interest rates rise so Investment to fall. (AD decrease)
The government “crowds out” consumers
and/or investors 13
Additional Problems with Fiscal Policy
4. Net Export Effect
International trade reduces the effectiveness
of fiscal policies.
Example:
• We have a recessionary gap so the government
spends to increase AD.
• The increase in AD causes an increase in price
level and interest rates.
• U.S. goods are now more expensive and the US
dollar appreciates…
• Foreign countries buy less. (Exports fall)
• Net Exports (Exports-Imports) falls, decreasing
AD. 14
Explain this cartoon
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Activity
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Congressional Committees
As a group, analyze the situation, identify the
problem, and identify your solution
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1.) 1933
Situation:
• GDP fell -1.2%
• Inflation rate= -.5%
• Unemployment Rate=25%
Your Solution:
What actually happened:
• FDR increased public works via the New Deal
programs.
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2.) 1944
Situation:
• GDP grew 8%
• Inflation rate= 3.7%
• Unemployment Rate=1.2%
Your Solution:
What actually happened:
• War ended the next year and government
orders for war materials decreased.
• Many public works programs were
discontinued
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3.) 1980
Situation:
• GDP fell -0.3%
• Inflation rate= 13.5%
• Unemployment Rate=7.1%
Your Solution:
What actually happened:
• The next year, President Regan and congress
lowered taxes on individuals and corporations
by about 30%. (Supply-side Economics)
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4.) 2003
Situation:
• GDP fell 0.5%
• Inflation rate= 1.5%
• Unemployment Rate=12.0%
Your Solution:
What actually happened:
• Congress voted to give tax cuts to
citizens. (Bush Tax Cuts)
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