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Economics Chapter 15
Terms in this set (28)
Federal government's attempt to influence or stabilize the economy through taxing and government spending.
An approach to lower unemployment and raise output by stimulating aggregate demand.
A change in investment spending that will have a magnified effect on total spending.
The change in investment spending cause by a change in total spending.
Impact Of Demand -Side Policies
1. "Priming the pump" - term used to suggest that only a small amount of government spending was needed to initiate a bigger round of overall spending in the economy.
2. Automatic Stabilizer - Programs that automatically trigger government spending on certain benefits when economic growth slows down.
3. Role of Government- only the government is big enough to step in and offset changes in investment sector spending.
4. How defecit spending works
Important Automatic Stabilizer
The Progressive Income tax
Insurance that workers who lose their jobs through no fault of their own can collect from individual states for a limited amount of time.
Broad social programs that use established eligibility requirements to provide income supplements(function as automatic stabilizer).
Limitations of demand side policies
1. The problem of Leads and Lags
2. Increased Dependency on Government- The possibility and probability that people will become dependent on the federal government rather than their own skills and initiative.
3. Reaching a "Tipping Point"- It's likely that a tipping point will arrive when people decide that the burden of taxes needed to finance government expenditures will outweigh the benefits.
4. The Keynesian Legacy
Spendings delayed for three reasons
1. Recognition lag- It takes time to understand how the economy is changing.
2. Legislative lag- Takes time to agree on the solution to an economic down turn.
3. Implementation lag- The amount of time it takes for an approved spending project or tax cut to actually pump money into the economy and create jobs.
Supply Side Policies
target producers who are also suppliers to stimulate their output and therefore provide jobs.
A smaller role for government
The key goal for supply siders is to reduce the economic role of the federal government, which they argue dampens production and slows growth.
cut number of agencies
cut federal spending
Lower federal taxes
lower tax rates allow individuals to keep more of the money they earn which encourages them to work harder
possible relationship between federal income tax rates and tax revenues
relaxing or removing government regulations that restrict the activities of firms in certain industries
Impact and Limitations of Supply Side Policies
1. President Reagan's Budget Priorities
2. Taxt Rates and Economic Growth- lower tax rates and reduced government regulations would provide a climate for strong economic growth.
3. Tax Rates and Tax Revenues
4. Deregulation and Economic Growth- Policies that promote productivity, reduce unnecessary paperwork, or otherwise stimulate the economy to grow to its maximum potential are certainly worthwhile.
5. Supply and Demand Siders- Final Comparison: supply side policies and demand side policies have the same goal: increase production and decrease unemployment without increasing inflation.
focuses on the economy as a whole and decision making by large units.
Supply and demand
Determine the equilibrium price and how much is produced
price when quantity supplied equals quantity demanded ( price that clears the market)
Total value of goods and services that all firms would produce in a specific period of time at various price levels
Aggregate Supply Curve
shows the amount of real GDP that would be produced at various price levels
Aggregate Supply can increase or decrease
- It tends to go up when the cost of production declines
- Increase in cost of production tend to decrease aggregate supply
total value of all goods and services demanded at different price levels
Aggregate demand curve
represents the sum of all consumer, business, government, and net foreign demands at various price levels
amount of real GDP consistent with a given price level intersection of aggregate supply and aggregate demand
2 major problems in macroeconomics
- inflation: increasing price levels ( vertical axis)
- recessions: decrease in real GDP ( horizontal axis)
Some of the most effective policies used to prevent recessions
demand side automatic stabilizers