MACRO ECONOMIC GOVERNMENT POLICY NATIONAL ECONOMIC POLICY GOALS

MACRO ECONOMIC GOVERNMENT POLICY

NATIONAL ECONOMIC POLICY GOALS l Sustained economic growth as measured by gross domestic product (GDP) l GDP is total amount of goods and services produced in the US each year l Low inflation l Full employment

UNEMPLOYMENT l Measured by the Bureau of Labor Statistics l Definition “members of the labor force who are looking for work, but unable to find jobs. ” l Unemployment rate = % unemployed l Estimate is low - “discouraged workers” not included

INFLATION l Defined as the sustained rise in prices l Measured by the Consumer Price Index (CPI) l Inflation reduces purchasing power of consumers l Comparing real GDP between years means accounting for inflation (GDP deflator)

BUSINESS CYCLE l Periods of GDP growth are called expansions or boom periods l 6 months of falling GDP is called a recession. l Severe GDP drop is depression l Top of the business cycle is peak l Bottom recession called trough

FISCAL POLICY l Government tax and spending policies designed to stimulate or contract GDP l During recession government seeks to use stimulatory fiscal policy l During an expansion and rising prices government seeks to use contractionary fiscal policy

KEYNESIAN ECONOMICS l John Maynard Keynes called for increased government spending and tax cuts during the Great Depression l Keynesian economics focuses on government tax and spending policies

STIMULATORY FISCAL POLICY l Goal is to increase employment and GDP during a recession l increase government spending l Tax cuts also stimulates consumer spending and business investment l Consumption up + Business Investment up + Government up +NX = GDP up

CONTRACTIONARY FISCAL POLICY l Designed to bring inflation down l Government spending decreases l Tax increases

AUTOMATIC STABILIZERS l Unemployment insurance goes up during a recession, therefore consumption is maintained even with unemployment l During a recession taxes decline due to progressive tax policy l During an expansion taxes increase as consumers and businesses generate more income.

GOVERNMENT BORROWING l Keynes believed that during a recession governments should deficit spend to fund programs (not increase taxes) l Governments borrow by selling Treasury bills. l T-bills are purchased by wealthy individuals, businesses, and foreign investors

NATIONAL DEBT l In recent years national debt has increased. l Clinton years government ran a surplus due to tax increases and the dot. com expansion l Bush years government ran a deficit and national debt increased due to tax cuts and financing war in Iraq.

MONETARY POLICY l US government can expand money supply during a recession or contract money supply during an expansion l Money supply is controlled by the Federal Reserve Banks

FEDERAL RESERVE BANK l 14 districts l Federal Reserve chairman - Benjamin Bernanke l Federal Reserve

MONEY SUPPLY l Total amount of money circulating in the economy l Money supply is determined by the federal reserve banks

“LOOSE” MONEY l Federal reserve can expand the money supply during a recession by l 1. Lowering reserve rate required for member banks l 2. Lowering rediscount rate (interest rate charged by the Fed) l 3. Buying Bonds, which puts more money in bond holders hands

“TIGHT” MONEY l Federal Reserve can try to slow down inflation by: l 1. Raising reserve rate l 2. Raising rediscount rate l 3. Selling bonds, which takes money out of the private economy

TIME LAG PROBLEM IN ECONOMIC POLICY l The problem with government economic problem is that each policy takes time to work. l Often by the time the problem is diagnosed and fiscal or monetary policy are in place the economy has changed. l This is called the “time lag” problem.

Taxes l Largest source of government income is individual income taxes l US has progressive income tax structure (wealthier groups pay higher percentage) l Social Security taxes (FICA) are tax on wages l Additional taxes include: corporate taxes, estate taxes, state income tax, sales

Social Security l Passed during Depression to create a pension for all Americans l 6. 2 % of income l Not a fund, current workers pay for retiring workers l Ratio of retiress to workers rising, therefore long term not enough to cover retirees

Solutions to Social Security l Increase social security tax l Get rid of income cap on taxes l Increase age of beneficiaries l Privatize social security to make IRA l Increase immigration to increase percentage of current workers to retirees

World trade l US imports 14% of GDP l Exports 12% of GDP l Last several years, US running large trade deficits (value of imports higher than exports) l Some Americans suggesting tariffs (taxes on foreign goods) or quotas on foreign goods to reduce imports.

Free Trade versus Protectionism l Free Trade advocates say US benefits from lower prices on foreign goods and the ability to export US products to foreign countries l Protectionists argue US not being treated fairly in foreign markets and are losing important jobs at home to foreign competition.

Globalization and Trade Organizations l World Trade Organization (WTO) - 140 member countries monitors and negotiates trade disputes l North American Free Trade Organization (Canada, US and Mexico) l European Union (EU)