AGENDA

 Bellwork- Review Questions

 Automatic Stabilizers vs Discretionary Fiscal Policy
 Falling Deficit Article
 Economic Theories Notes
 Keynes and Hayek Video
 Keynes and Hayek Comparison

OUTCOMES
 Students will contrast the economic theories of Keynes and Hayek

regarding the use of fiscal policy

 Students will determine how the Federal Reserve uses monetary

policy to correct economic instability

Popquiz Results
 Class average 75%

 Most commonly missed question

 7. Limitations of Fiscal Policy- True or False: Oftentimes, the
government is very quick to enact fiscal policy, as it strives to
fix the economy as swiftly as possible.
Review Questions
1. Which institution is in charge of fiscal policy?
◦ A. Government

2. What are the two tools the government uses

in fiscal policy to affect the economy?
◦ B. Government Spending
◦ C. Taxation
 3. What type of fiscal policy should be used in
a recession?
 A. Expansionary

 4. What type of fiscal policy should be used in

a period of inflation?
 B. Contractionary
5. In contractionary FP, does the government want to increase or
decrease aggregate demand?
◦ B. Decrease

6. In contractionary FP, how does the government help the economy??

C. Increased taxes
Decreased government spending
7. In expansionary FP, how does the government help the
economy?

D. Decreased taxes

Increased government spending

$$
Difference between Discretionary
FP and Automatic Stabilizers
Fiscal Policy Notes pgs. 3-4
 Discretionary Fiscal Policy
• What does the word discretionary mean?
– Choose, optional
1. What is discretionary fiscal policy?
• Actions taken by the government by choice to correct economic
instability
– What active government responses are part of Discretionary FP?
A) Congress choosing to change taxes
B) Congress choosing to change government spending
 Automatic Stabilizers
2. What are automatic stabilizers?
– Features of fiscal policy that automatically stabilize the
economy (such as public transfer payments)
• What is a public transfer payment?
– Money the government transfers (gives) to the public
– Ex: Unemployment compensation, food stamps
 Challenge Question!!
1. Which type of fiscal policy involves an active
government choice to make changes to the
economy?
A. Automatic Stabilizers
B. Discretionary Fiscal Policy
 Automatic Stabilizers
3. How do public transfer payments automatically stabilize the
economy in a recession?
– More people qualify for government benefits like food stamps in a recession.
– They get more money to spend from the government
• This increases aggregate demand and helps the economy

4. How do public transfer payments automatically stabilize the

economy when it is growing too fast (inflationary period)?
– Economy is doing well so fewer people qualify for benefits like food stamps
– This takes $ out of the economy, which reduces aggregate demand, and keeps
prices from rising
 Automatic Stabilizers
5. How do progressive income taxes act as automatic stabilizers during
prosperous times?
• When a person’s salary increases they pay more taxes. Taxes prevent
some of this increased income from entering the economy, which
keeps inflation in check.

6. How do progressive income taxes act as automatic stabilizers during a

recession?
• People make less, they pay less in tax, which reduces impact of
recession
 Challenge Question!!
2. During an inflationary period, would
automatic stabilizers such as food stamps
increase or decrease?
A. Increase
B. Decrease Less money in the
economy= stability
 Challenge Question
3. Considering that income taxes are an automatic
stabilizer, how could your tax bracket change during a
recession?
A. Many people move up a tax bracket and pay more in
taxes
B. Many people move down a tax bracket and pay less in
taxes

Recession
 Challenge Question
• Matching:
4) Congress decided to make changes A. Automatic Stabilizers
to taxation
B. Discretionary Fiscal Policy
5) Unemployment compensation
increases during a recession
 Article: Falling Deficit
• Before Reading…
• Question: What is the difference between the federal debt and
federal deficit?
– The deficit is the fiscal year difference between what the United States
Government takes in from taxes and other revenues, and the amount of
money the Government spends.
– Ex: the government takes in $10 billion in taxes and revenue, but spends
$15 billion

– The debt is our accumulated deficits plus that we have acquired over the
years. 
• the problem is that the government continues to spend more money each year
than it takes in, causes us to have deficits every year.
Economic Theories
Smith, Keynes and Hayek

Pg. 4 of Standard 7 Notes packet

 Adam Smith (1723-1790)
◦ Scottish political economist
◦ Father of economics
◦ Wrote The Wealth of Nations
 Government does not need to
control economy
 Economies self-regulate
according to supply and
demand

◦ LAISSEZ FAIRE (French, “let do”

or let it be, leave it alone)
 John
Maynard Keynes
(1883-1946)
British academic and
government economist
Introduced the idea of using
government action to
stimulate aggregate demand
Wrote “The General Theory
of Employment, Interest and
Money” which marked the
beginning of the field of
macroeconomics

GOVERNMENT
INVOLVEMENT
 Friederich von Hayek (1899-1992)
◦ Austrian-British economist and political philosopher
◦ Considered to be one of the 21st century’s most
important economists and philosophers
◦ Argued for the classical economic view: less
government and more freedom in the marketplace
 In times of distress, eventually the economy will fix itself
 No need for government interference

◦ LAISSEZ FAIRE
Challenge Questions
6. Which economist do you think would
advocate using fiscal policy to fix problems in
the economy?
A. Keynes
B. Hayek

7. Why would Hayek be against using fiscal

policy to fix the economy?
 In Fear the Boom and Bust, two famous economists
from the Great Depression years - John Maynard
Keynes and F. A. Hayek - come back to life to attend
an economics conference on the 2008-2010
recession.
 Before the conference begins, they go out for a night

on the town and rap about why there's a "boom and

bust" cycle in modern economies.
Two main topics discussed in video:
 Use of expansionary fiscal policy to solve a
recession

 Use of expansionary monetary policy

◦ Low interest rates, cheap credit
◦ Goal is to get $$$ into the economy by the Federal
Reserve through setting low interest rates
◦ Who is for this low interest? Who isn’t?
Fear the Boom and Bust Video
 Challenge Question #8: How were the boom
and bust illustrated on this video?

 http://network.nationalpost.com/np/blogs/f
ullcomment/archive/2010/01/29/fear-the-b
oom-and-bust-lyrics-waiting-for-recovery-s
eriously-that-s-outrageous.aspx
Fear the Boom and Bust Comparison
 Challenge Question #8: How were the boom and bust
illustrated on this video?
   
Keynes Hayek
   
How does the economist feel
about control of the markets?
   
What does the economist
blame for economic
problems?
   
How does the economist feel
about using government
spending to boost aggregate
demand during a recession?
   
How does the economist feel
about saving versus
spending?
   
Challenge Question #9
 Which economist do you agree with the most
regarding the use of fiscal/monetary policy?
Why?