ECON 203 Lecture 9 Outline of Last Lecture I Main Idea II Business Cycle III Keynesian Theory Outline of Current Lecture I Main Idea II Fiscal Policy Current Lecture Main Ideas Macroeconomics is specifically analyzed in relation to the fluctuations of the Economy We measure Economy by actual Economic performance Monetary Policy and Fiscal Policy are two types of economic policy Fiscal Policy refers to government taxes and government expenditures Counter Cyclical Policy Supposed to pursue policies that have the opposite effect of what the economy is doing Keynesian These are used to slow expansion and stop recession since the goal is to smooth the GDP business cycle over time Counter Cyclical Policy is ideal Policy doesn t always happen in real life though Policy applies to ups and downs Fiscal Policy Fiscal Policy Manipulation of Government Taxes and expenditures to influence the Economy ups and downs There are 2 types of Fiscal Policy both are Counter Cyclical in theory Automatic and Discretionary Automatic Policy Used as a stabilizer When the economy this pre established Policy goes into effect think cruise control up and down hills It is triggered based on economic events Example Unemployment Payments if people lose their jobs then they start to receive unemployment checks automatically in order to keep up Consumption instead of a drastic fall and a deflationary gap Counter Cyclical because economy is going down so Government spends to keep it up However if people get jobs back then the checks automatically stop coming so people don t over consume and create an inflationary gap counter cyclical because economy going up government decreases spending to prevent over consumption Discretionary Policy Make up policy as you see fit It is left up to the government political process to determine what Policies are made These are not always permanent and designed at the moment for the occasion Example People are making X amount of money with the economy in Expansion and Congress increases Taxes to slow spending because they predict this will help the economy fluctuations be smoother counter cyclical because increase in taxes slows expansion while there in expansion