1. Demand-side and Supply-side Policies Macroeconomics Section 3.4

2. Automatic stabilizers when economy overheats • Social benefits and taxes can act as automatic stabilizers

3. Automatic stabilizers in recession • Social benefits and taxes can act as automatic stabilizers

4. Fiscal and Monetary Policies Demand-side & Supply-side Policies

5. Discretionary Stabilization Policies

6. Demand-side Policies

7. Expansionary Fiscal Policies (in recession)

8. The Government Budget and the National Debt (Public Debt) • Government Budget = annual government spending • Budget Surplus = Tax Receipts > Spending • Budget Deficit = Tax Receipts < Spending • National Debt = Money borrowed domestically and/or internationally (foreign debt) to balance the budget • National Debt often expressed as % of GDP

11. Contractionary Policies (in inflation)

12. Strengths of Fiscal Policy

13. Weaknesses of Fiscal Policy

14. The Neoclassical/Monetarist Challenge • Argument that discretionary fiscal polices that try to stabilize the economy are so flawed that they actually cause instability Monetarist argue that governments should: • Take a long-term view about spending and taxation to achieve social priorities • Ensure steady supply of money • Ensure price and wage flexibility • Focus on supply-side policies to achieve economic growth

15. Supply-side PoliciesMarket-orientated/ Interventionist-orientated

16. Growth Policies

17. Supply-side Policies Market-orientated

18. Market-orientated Policies

19. Market-orientated Supply-side Policies: Objectives

20. Reduce Government Sector

21. Reduce Government Sector: Pros and Cons

22. Improve incentives by lowering taxes

23. Improving incentives : Pros and Cons

24. Make labor more responsive to supply and demand

25. Make labor more responsive to supply and demand : Pros and Cons

26. Supply-side Policies Interventionist-orientated

27. Government policies to improve industry

28. Government policies to improve industry: Pros and Cons

29. Shifting the SRAS and the LRAS in the AS-AD Model

30. The Multiplier, accelerator and crowding effect HL Topics

31. The Multiplier Effect

32. Marginal Propensity 1

33. Example of the Multiplier in Effect Assumption 60% of additional income spent on Consumption (MPC = 0.6) The Multiplier = 1/1-MPC

34. The Multiplier Effect

35. The Accelerator Theory & the Combined multiplier/accelerator effect • Argues that small changes in GDP produces larger changes in investment spending. • These fluctuations interact with the Multiplier effect to increase the momentum of business cycle.

36. Crowding-out Effect

37. Crowding-out Effect

38. Crowding-out Effect