Module 30

Budget Balance

Difference between what the government spends and what the government brings in.

Major source of income is tax revenue.

Fiscal Policy

Will automatically adjust (automatic stabilizer).

1. Government spending
2. Tax revenue

Reduce the severity of recessions and inflations.

Monetary Policy

We've talked about RR, Dis. Rate, OMO.

We're now going to apply them towards fixing the economy.

Expansionary Monetary Policy

Increases the money supply to increase aggregate demand.

Increase government spending.

Runs the the budget towards a deficit (as you both are increasing spending as well as decreasing taxes).

Contractionary Monetary Policy

Decreases the money supply to decrease aggregate demand.

Money Market

By shifting the money supply, it changes the interest rate.

Expanding it will reduce the interest rate and make it cheaper to borrow, thus more spending.

Contracting it will increase the interest rate and make it more expensive to borrow, thus less spending.

Interest Sensitive Consumer Spending

Spending that requires a loan.

This will increase when the money supply increases.

Federals Fund Rate

The interest rate banks charge other banks for loans.

Two sources of inflation:

• Cost-Push inflation
  • Caused by a significant increase in the cost of inputs.
• Demand-Pull inflation
  • Caused by an increase in aggregate demand.

Phillip's Curve

In a Recession

1. Government spending will automatically increase
   1. Because a government will increase its transfer payments.
      1. Unemployment benefits
2. Tax revenue drops

In an Inflation

1. Government spending will automatically drop
   1. Because a government will decrease its transfer payments.
      1. Few use unemployment benefits
2. Tax revenue increases

No, Congress should not be required to run an annual balanced budget.

The budget deficit will increase during recessions, and decrease during periods of economic expansions.

Cyclically adjusted.

Implicit Liability

Spending promised by governments. Not included in our debt statistics.

• Social security
• Medicare