Posted on internet Friday 05 19 Chapter 15: Section 2: Fiscal Policy Options Date Due: Monday 05 21 Pgs. 395 to 401 Graphs Fig. 15. 1; 15. 2; 15. 3; 15. 4; 15. 5; 15 ; 15. 7 15 Global Connection: pg. 392 Skills for Life: page

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Posted on internet Friday 05_19

Chapter 15: Section 2: Fiscal Policy Options

Date Due: Monday 05_21 Pgs. 395 to 401

Graphs Fig.15.1; 15.2; 15.3; 15.4; 15.5; 15.6.; 15.7 15.8. Global Connection: pg. 392 Skills for Life: page: 394 Fast Fact pg.407; Economic Profile John Maynard Keynes pg.402,; Case study pg: 409

Objectives: After studying this section you will be able to:

A. Compare and contrast classical economics and Keynesian economics.

B. Explain the basic principles of supply-side economics

C. Understand the role that fiscal policy has played in American history.

Main Idea: Fiscal policy is the use of government spending and taxes to work toward low unemployment, low inflation, and steady economic growth. Keynesian economic theories and supply-side economic theories suggest two very different ways for government to encourage growth.

Classical Economics

1. The idea that free markets regulate themselves is at the heart of a school of thought known as__________ economics. The father of classical economics is considered to be_________. For more than one_____years classical economics dominated government policies. The_______ Depression challenged classical economic theory. No one knew how_______ it would take for equilibrium to reestablish itself, how long would the Great_________ would last.

Keynesian Economics

1. John Maynard Keynes, a British economist, said let's concentrate on the short run because in the long run we are all_____. In the year________ during the Great Depression John Maynard Keynes published The General Theory of Employment, Interest, and Money. His theories he said, would get would get economies and prevent economies from getting into recessions and depressions.

2. Keynesian economics took a_________ of the country's economy, Keynes focused on the economy as a________ not individual pieces like classical economics.__________ capacity or full employment output, is the maximum output that an economy can sustain over a period of time without increasing________. The only way to and the Great Depression, according to Keynes, was for someone to start_________ so then people would have money to buy goods and services.

3. Keynes thought that the spender should be the_______. Keynes said when the government starts buying goods and services this will put money in the hands of suppliers which will employ workers which will then have money to buy goods and services. Changing demand to help the economy is called_______ side economics._________ economics is basically the idea that the economy is posed of three sectors a) individuals b) business c) government.

4. Keynes argued that the two fundamental problems of macroeconomics are a). The recession/depression b) and periods of inflation. Keynes maintained that fiscal policies, expansionary, and contractionary fiscal policies could stabilize economies prevent deep cycles of recessions and inflationary periods.

5. The___________ affect in fiscal policy is the idea that for every one dollar that the government spends or every one dollar decreased taxes creates a greater than one dollar change in national income, in other words the effects of changes in fiscal policy are multiplied. An investment of $10 could multiply itself into $50 as businesses and individuals continue to spend part of the initial $10.

6. A________ economy is one which there are no rapid changes in the economic indicators. Economic________-- has been much more stable the last 50 years using fiscal policies. Taxes and payments from the government individuals tend to___________ economic activity. Taxes and transfer payments are known as________ stabilizers.

Supply_Side Economics:

7._______ side economics stresses the influence of taxation on the economy, while Keynesian economics stresses aggregate_______ supply-side economics tries to increase economic growth by increasing aggregate________.

8.__________ shows the relationship between the tax rate set by the government and the total tax revenue that the government collects, study figure 15.7 on page 399 and the Laffer curve suggests that the higher the taxes the less tax revenue will be produced by the economy, in other words the less you tax, the more tax revenue will be available. In other words if you tax people 100% no one would work and the government would collect no tax revenue, if the government would not tax at all it would collect zero tax revenues, as you raise taxes, tax revenues also rise but only up to a point, if you continue to raise taxes, tax revenues will eventually decline as people will want to work less and less because taxes are too high.

9) In practice research has shown that taxpayers do not react strongly enough to tax ____ to increase tax________.

Fiscal Policy in American History

10. John Maynard Keynes was proven right, as demand for goods and services increased to fight World War II the country came out of the Great________. President Kennedy used Keynesian economics during his administration, President Reagan used supply-side economics during his administration but also increased government spending as did George H.W. Bush and the early years of President Clinton. Reagan, George HW Bush, and President Clinton all spent much more money than what the government collected.
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