Fiscal, Monetary and S-Side Policies 2.4, 2.5, 2.6
IB Syllabus Requirements:
The government budget
Sources of government revenue
• Explain that the government earns revenue primarily from taxes (direct and indirect), as well as from the sale of goods and services and the sale of state-owned (government owned) enterprises.
Types of government expenditures
• Explain that government spending can be classified into current expenditures, capital expenditures and transfer payments, providing examples of each.
The budget outcome
• Distinguish between a budget deficit, a budget surplus and a balanced budget. • Explain the relationship between budget deficits/ surpluses and the public (government) debt.
The role of fiscal policy
Fiscal policy and short-term demand management
• Explain how changes in the level of government expenditure and/or taxes can influence the level of aggregate demand in an economy.
• Describe the mechanism through which expansionary fiscal policy can help an economy close a deflationary (recessionary) gap.
• Construct a diagram to show the potential effects of expansionary fiscal policy, outlining the importance of the shape of the aggregate supply curve.
• Describe the mechanism through which contractionary fiscal policy can help an economy close an inflationary gap.
• Construct a diagram to show the potential effects of contractionary fiscal policy, outlining the importance of the shape of the aggregate supply curve.
The impact of automatic stabilizers
• Explain how factors including the progressive tax system and unemployment benefits, which are influenced by the level of economic activity and national income, automatically help stabilize short-term fluctuations
Fiscal policy and its impact on potential output
• Explain that fiscal policy can be used to promote long-term economic growth (increases in potential output) indirectly by creating an economic environment that is favourable to private investment, and directly through government spending on physical capital goods and human capital formation, as well as provision of incentives for firms to invest.
Evaluation of fiscal policy
• Evaluate the effectiveness of fiscal policy through consideration of factors including the ability to target sectors of the economy, the direct impact on aggregate demand, the effectiveness of promoting economic activity in a recession, time lags, political constraints, crowding out, and the inability to deal with supply-side causes of instability.
Theory of knowledge: potential connections: In one sense the imposition of taxes by government on individuals amounts to a restriction of individual freedom. How can we know when such government interference in individual freedom is justified?
2.5 Monetary policy
Interest rates
Interest rate determination and the role of a central bank
• Describe the role of central banks as regulators of commercial banks and bankers to governments.
• Explain that central banks are usually made responsible for interest rates and exchange rates in order to achieve macroeconomic objectives
• Explain, using a demand and supply of money diagram, how equilibrium interest rates are determined, outlining the role of the central bank in influencing the supply of money.
The role of monetary policy:
Monetary policy and short-term demand management
• Explain how changes in interest rates can influence the level of aggregate demand in an economy.
• Describe the mechanism through which easy (expansionary) monetary policy can help an economy close a deflationary (recessionary) gap.
• Construct a diagram to show the potential effects of easy (expansionary) monetary policy, outlining the importance of the shape of the aggregate supply curve.
• Describe the mechanism through which tight (contractionary) monetary policy can help an economy close an inflationary gap.
• Construct a diagram to show the potential effects of tight (contractionary) monetary policy, outlining the importance of the shape of the aggregate supply curve.
Monetary policy and inflation targeting
• Explain that central banks of certain countries, rather than focusing on the maintenance of both full employment and a low rate of inflation, are guided in their monetary policy by the objective to achieve an explicit or implicit inflation rate target.
Evaluation of monetary policy
• Evaluate the effectiveness of monetary policy through consideration of factors including the independence of the central bank, the ability to adjust interest rates incrementally, the ability to implement changes in interest rates relatively quickly, time lags, limited effectiveness in increasing aggregate demand if the economy is in deep recession and conflict among government economic objectives.
2.6 Supply-side policies
The role of supply-side policies
Supply-side policies and the economy
• Explain that supply-side policies aim at positively affecting the production side of an economy by improving the institutional framework and the capacity to produce (that is, by changing the quantity and/or quality of factors of production).
• State that supply-side policies may be market-based or interventionist, and that in either case they aim to shift the LRAS curve to the right, achieving growth in potential output.
Interventionist supply-side policies
Investment in human capital
• Explain how investment in education and training will raise the levels of human capital and have a short-term impact on aggregate demand, but more importantly will increase LRAS.
Investment in new technology
• Explain how policies that encourage research and development will have a short-term impact on aggregate demand, but more importantly will result in new technologies and will increase LRAS.
Investment in infrastructure
• Explain how increased and improved infrastructure will have a short-term impact on aggregate demand, but more importantly will increase LRAS.
Industrial policies
• Explain that targeting specific industries through policies including tax cuts, tax allowances and subsidized lending promotes growth in key areas of the economy and will have a short-term impact on aggregate demand but, more importantly, will increase LRAS.
Market-based supply-side policies
Policies to encourage competition
• Explain how factors including deregulation, privatization, trade liberalization and antimonopoly regulation are used to encourage competition.
Labour market reforms
• Explain how factors including reducing the power of labour unions, reducing unemployment benefits and abolishing minimum wages are used to make the labour market more flexible (more responsive to supply and demand).
Incentive-related policies
• Explain how factors including personal income tax cuts are used to increase the incentive to work, and how cuts in business tax and capital gains tax are used to increase the incentive to invest.
Evaluation of supply-side policies
The strengths and weaknesses of supply side policies
• Evaluate the effectiveness of supply-side policies through consideration of factors including time lags, the ability to create employment, the ability to reduce inflationary pressure, the impact on economic growth, the impact on the government budget, the effect on equity, and the effect on the environment.
Theory of knowledge: potential connections: How can we know whether government should support pure research, which might contribute to the sum total of human knowledge but which might never have an impact on technology? What other knowledge issues are relevant to investment in pure research? Investment in education and training is a common supply-side policy. What other reasons could there be for supporting the education of the population? What knowledge issues arise in answering the question as to whether government should shoulder this responsibility or whether it should be left to the market?
Day 1: The Government Budget/Fiscal Policy
Goals for the day:
The government budget
Sources of government revenue
• Explain that the government earns revenue primarily from taxes (direct and indirect), as well as from the sale of goods and services and the sale of state-owned (government owned) enterprises.
Types of government expenditures
• Explain that government spending can be classified into current expenditures, capital expenditures and transfer payments, providing examples of each.
The budget outcome
• Distinguish between a budget deficit, a budget surplus and a balanced budget. • Explain the relationship between budget deficits/ surpluses and the public (government) debt.
The role of fiscal policy
Fiscal policy and short-term demand management
• Explain how changes in the level of government expenditure and/or taxes can influence the level of aggregate demand in an economy.
• Describe the mechanism through which expansionary fiscal policy can help an economy close a deflationary (recessionary) gap.
• Construct a diagram to show the potential effects of expansionary fiscal policy, outlining the importance of the shape of the aggregate supply curve.
• Describe the mechanism through which contractionary fiscal policy can help an economy close an inflationary gap.
• Construct a diagram to show the potential effects of contractionary fiscal policy, outlining the importance of the shape of the aggregate supply curve.
The impact of automatic stabilizers
• Explain how factors including the progressive tax system and unemployment benefits, which are influenced by the level of economic activity and national income, automatically help stabilize short-term fluctuations
Fiscal policy and its impact on potential output
• Explain that fiscal policy can be used to promote long-term economic growth (increases in potential output) indirectly by creating an economic environment that is favourable to private investment, and directly through government spending on physical capital goods and human capital formation, as well as provision of incentives for firms to invest.
Evaluation of fiscal policy
• Evaluate the effectiveness of fiscal policy through consideration of factors including the ability to target sectors of the economy, the direct impact on aggregate demand, the effectiveness of promoting economic activity in a recession, time lags, political constraints, crowding out, and the inability to deal with supply-side causes of instability.
Theory of knowledge: potential connections: In one sense the imposition of taxes by government on individuals amounts to a restriction of individual freedom. How can we know when such government interference in individual freedom is justified?
2.4 - Fiscal Policy (1).pptxCan tax cuts spur growth?
Research – Find ONE example of a fiscal policy in the country of your choice –(G spending, taxes, or transfer payments)
For the policy, acquire information including:
● Approximate dates of the policy
● The name (if applicable) of the policy / bill / law
● The cost of the policy / bill / law
● The intended effect of the policy this should fit into 1 or more of G’s macro goals: full employment, price stability, economic growth, external equilibrium, or economic
● The actual effect(s) of the policy – this is the historical account of what did happen
Application – Graph each policy, then compare what economic theory says should happen, and what actually did happen (this might be a comparison of the intended and actual effects). Write an explanation of your graph and the intended and actual effects.
Evaluation – In your opinion, was the G wise to pursue this policy or not? Think about to what extent the policy was and wasn’t successful. Did the policy reach its goal? Was the expense worth the outcome? Were other variables involved so it’s hard to determine the effectiveness of this policy? Are short and long run applicable? Be sure to explain BOTH sides of the story + your own opinion. Also, you must have data to substantiate your claims!
Day 2: Monetary Policy
Goals for the day:
Interest rates
Interest rate determination and the role of a central bank
• Describe the role of central banks as regulators of commercial banks and bankers to governments.
• Explain that central banks are usually made responsible for interest rates and exchange rates in order to achieve macroeconomic objectives
• Explain, using a demand and supply of money diagram, how equilibrium interest rates are determined, outlining the role of the central bank in influencing the supply of money.
The role of monetary policy:
Monetary policy and short-term demand management
• Explain how changes in interest rates can influence the level of aggregate demand in an economy.
• Describe the mechanism through which easy (expansionary) monetary policy can help an economy close a deflationary (recessionary) gap.
• Construct a diagram to show the potential effects of easy (expansionary) monetary policy, outlining the importance of the shape of the aggregate supply curve.
• Describe the mechanism through which tight (contractionary) monetary policy can help an economy close an inflationary gap.
• Construct a diagram to show the potential effects of tight (contractionary) monetary policy, outlining the importance of the shape of the aggregate supply curve.
Monetary policy and inflation targeting
• Explain that central banks of certain countries, rather than focusing on the maintenance of both full employment and a low rate of inflation, are guided in their monetary policy by the objective to achieve an explicit or implicit inflation rate target.
Evaluation of monetary policy
• Evaluate the effectiveness of monetary policy through consideration of factors including the independence of the central bank, the ability to adjust interest rates incrementally, the ability to implement changes in interest rates relatively quickly, time lags, limited effectiveness in increasing aggregate demand if the economy is in deep recession and conflict among government economic objectives.
Japanese example of negative interest rates
Research – Find ONE example of a monetary policy in the country of your choice –(interest rates or money supply)
For each policy, acquire information including:
● Approximate dates of the policy
● The name (if applicable) of the policy / bill / law
● The cost of the policy / bill / law
● The intended effect of the policy this should fit into 1 or more of G’s macro goals: full employment, price stability, economic growth, external equilibrium, or economic
● The actual effect(s) of the policy – this is the historical account of what did happen
Application – Graph each policy, then compare what economic theory says should happen, and what actually did happen (this might be a comparison of the intended and actual effects). Write an explanation of your graph and the intended and actual effects.
Evaluation – In your opinion, was the G wise to pursue this policy or not? Think about to what extent the policy was and wasn’t successful. Did the policy reach its goal? Was the expense worth the outcome? Were other variables involved so it’s hard to determine the effectiveness of this policy? Are short and long run applicable? Be sure to explain BOTH sides of the story + your own opinion. Also, you must have data to substantiate your claims!
Presentation – Create either a PowerPoint or Prezi to present your explanations, data and opinions. You will add slides to this presentation as you learn about more types of policies. The presentation should be visually attractive and be well organized/easy to follow.
You will make a final presentation on day 4, after you have researched the other policies that can be used to stimulate the economy.
Homework: Read pp385-400 and do practice questions
Day 3: Supply-Side Policies
Goals for the Day:
2.6 Supply-side policies
The role of supply-side policies
Supply-side policies and the economy
• Explain that supply-side policies aim at positively affecting the production side of an economy by improving the institutional framework and the capacity to produce (that is, by changing the quantity and/or quality of factors of production).
• State that supply-side policies may be market-based or interventionist, and that in either case they aim to shift the LRAS curve to the right, achieving growth in potential output.
Interventionist supply-side policies
Investment in human capital
• Explain how investment in education and training will raise the levels of human capital and have a short-term impact on aggregate demand, but more importantly will increase LRAS.
Investment in new technology
• Explain how policies that encourage research and development will have a short-term impact on aggregate demand, but more importantly will result in new technologies and will increase LRAS.
Investment in infrastructure
• Explain how increased and improved infrastructure will have a short-term impact on aggregate demand, but more importantly will increase LRAS.
Industrial policies
• Explain that targeting specific industries through policies including tax cuts, tax allowances and subsidized lending promotes growth in key areas of the economy and will have a short-term impact on aggregate demand but, more importantly, will increase LRAS.
Market-based supply-side policies
Policies to encourage competition
• Explain how factors including deregulation, privatization, trade liberalization and antimonopoly regulation are used to encourage competition.
Labour market reforms
• Explain how factors including reducing the power of labour unions, reducing unemployment benefits and abolishing minimum wages are used to make the labour market more flexible (more responsive to supply and demand).
Incentive-related policies
• Explain how factors including personal income tax cuts are used to increase the incentive to work, and how cuts in business tax and capital gains tax are used to increase the incentive to invest.
Evaluation of supply-side policies
The strengths and weaknesses of supply side policies
• Evaluate the effectiveness of supply-side policies through consideration of factors including time lags, the ability to create employment, the ability to reduce inflationary pressure, the impact on economic growth, the impact on the government budget, the effect on equity, and the effect on the environment.
Presentation:
Review:
Here's an example of Supply Side programs that are meant to help entrepreneurs in New Mexico. Pay attention to how much the government is involved in these programs:
Research – Find ONE example of supply-side policy in the country of your choice:
(anything that changes the quality or quantity of a country’s resources)
For each policy, acquire information including:
● Approximate dates of the policy
● The name (if applicable) of the policy / bill / law
● The cost of the policy / bill / law
● The intended effect of the policy this should fit into 1 or more of G’s macro goals: full employment, price stability, economic growth, external equilibrium, or economic
● The actual effect(s) of the policy – this is the historical account of what did happen
Application – Graph each policy, then compare what economic theory says should happen, and what actually did happen (this might be a comparison of the intended and actual effects). Write an explanation of your graph and the intended and actual effects.
Evaluation – In your opinion, was the G wise to pursue this policy or not? Think about to what extent the policy was and wasn’t successful. Did the policy reach its goal? Was the expense worth the outcome? Were other variables involved so it’s hard to determine the effectiveness of this policy? Are short and long run applicable? Be sure to explain BOTH sides of the story + your own opinion. Also, you must have data to substantiate your claims!
Presentation – Create either a PowerPoint or Prezi to present your explanations, data and opinions. You will add slides to this presentation as you learn about more types of policies. The presentation should be visually attractive and be well organized/easy to follow.
You will make a final presentation on day 4, after you have researched the other policies that can be used to stimulate the economy.
Homework: Read pp401-413 and do Practice questions
Why Obama Now Video:
Quantitative Easing:
Day 4: Review! Use all of the research you did on a Fiscal, Monetary and Supply-Side policy in the country of your choice, to share with a small group your thoughts about the effectiveness of each type of policy
Questions to answer for each type of policy (Fiscal, Monetary and S-Side)
1. What problem was addressed by each policy?
2. Draw a diagram of how the policy/move could impact the economy (AD/AS diagram)
3. Did it work to address the problem in the economy?
4. What are the drawbacks of the policy?
5. What stakeholders are involved in this decision?
6. Overall do you think it was the right decision for the government or central bank? Why?
7. Do you think a different policy might have worked better? If so, which one? Why?
Theory of knowledge: potential connections: How can we know whether government should support pure research, which might contribute to the sum total of human knowledge but which might never have an impact on technology? What other knowledge issues are relevant to investment in pure research? Investment in education and training is a common supply-side policy. What other reasons could there be for supporting the education of the population? What knowledge issues arise in answering the question as to whether government should shoulder this responsibility or whether it should be left to the market?
Austerity vs. Stimulus Article and Videos!
Paul Krugman (Stimulus is the answer)
Niall Ferguson (Austerity!)
What do YOU think?
AND Do corporate tax cuts really spur economic growth (AS increase)?
trumponomics:
Day 5: Time for practice questions and review
Paper 1 practice question:
a. Explain how business spending on research and development and government expenditure on infrastructure might shift the LRAS curve.
b. Evaluate the effectiveness of fiscal policy to reduce the rate of inflation.