2. Monetary
Policy
Fiscal
Policy
• Is used to speed up or slow
down the economy.
• Is used to speed up or slow
down the economy.
• Is conducted by banks (usually a
central bank controlled by the
national government).
• Is conducted directly by the
national government.
• Banks use tools such as interest
rates to influence aggregate
demand, or overall consumption,
in the economy.
• Governments use tools such as
taxation and spending to influence
aggregate demand, or overall
consumption, in the economy.
3. AGGREGATE DMAND
If people have more
money in their
pockets thanks to
lower interest rates
or lower taxes…
Aggregate means “whole” or “overall.”
Demand refers to what people are willing and able to buy.
…It increases
aggregate demand,
(or nationwide
spending) and
potentially improves
the economy.
4. Expansionary
Policy
Contractionary
Policy
• Is used to speed up the
economy, or increase aggregate
demand.
• Is used to slow down the
economy, or decrease aggregate
demand.
• Is used when the economy is in
a recession and economic growth
is needed.
• Is used when the economy is
experiencing so much growth that
too much inflation is occurring.
5. OPPOSITION
Pretend that the national government wants to speed
the economy by increasing spending.The money
needed to do this must be found somewhere, but it
can’t be gathered from increasing taxes because that
would counteract the benefit of increased spending.
Often, governments will resort to borrowing money
from other countries or international agencies.This
will increase the national debt.
6. OPPOSITION
Lowering taxes in order to increase consumer
spending is not effective if changes in taxation occur
too frequently. People are rational, and will not
increase their spending if they predict that taxes will
rise again in the future.
7. OPPOSITION
Government interference in the economy temporarily
creates growth, supports businesses, or lowers
unemployment, but after government spending is taken
away, the economy becomes imbalanced. Surpluses and
shortages are created, and businesses that should have
failed in a free market are artificially thriving despite
low demand. In other words, the government is
capable of creating problems in the economy that are
even worse than the ones that are naturally created in
the downswings of the business cycle.
8. OPPOSITION
In order to best speed the economy, the government
needs to start using monetary and fiscal policy before
the economy is in a recession. In order to slow the
economy, policies must go into effect before growth
becomes too fast. In other words, governments need
to be proactive, not reactive. It is very difficult to
predict future economic conditions, so government
economic policies are usually not as effective as they
could be.
9. FRIEDRICH HAYEK
• Lived 1899 – 1992
• Austrian economist who
challenged the views of Keynes.
• Believed that government
interference in the economy
creates imbalances, and that only
forces of supply and demand
(the free market) should control
the economy.
10. • After experiencing
economic collapse in Austria
after WWI due to inflation,
Hayek feared inflation
caused by government
policies.
• His book,The Road to
Serfdom, is about the
dangers of socialism.
• His school of thought is
called “Austrian Economics.”
11. Keynes vs. Hayek Rap Battle
To learn more about their viewpoints, we will watch and
read the lyrics of two songs. As you listen, underline ideas
that are familiar to you and circles ones that aren’t.
