PowerPoint assignment - due in 36 hours

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Stabilizing the Economy Through Fiscal Policy

• A million dollars can buy an Egg McMuffin and a large coffee for President Obama and 2,000 Secret Service members every day for six months.
• A billion dollars can buy Egg McMuffins and large coffees for them for 489 years.
• A trillion dollars can buy Egg McMuffins and large coffees for them for 488,992 years.

WHAT CAN a ____ DOLLARS BUY?

LG6

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See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

What Can A ____ Dollars Buy?

• Before showing the slide, ask students, “If you were a rich, generous person who wanted to treat President Obama and his 2,000 Secret Services members to an Egg McMuffin every morning, how many days could you treat them if you decided to spend a million dollars? A billion dollars? A trillion dollars?”
• Students are usually surprised to see how much a million, billion, or trillion dollars can buy.

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See Learning Goal 1: Explain basic economics.

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See Learning Goal 1: Explain basic economics.

This slide gives students insight into the definition of economics. When going over this definition it often helps to further define the term resources. The term resources ties back into Chapter 1 and the factors of production: land, labor, capital, knowledge and entrepreneurship.

See Learning Goal 1: Explain basic economics.

Businesses can contribute to an economic system by inventing new products that increase the availability of resources.

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See Learning Goal 1: Explain basic economics.

See Learning Goal 1: Explain basic economics.

See Learning Goal 1: Explain basic economics.

Thomas Malthus believed that if people were left to their own devices there would be chaos and that the government needed to be heavily involved in controlling the economy. Malthus’ ideas are still with us today. Neo-Malthusian ideas of overpopulation are still prevalent in books such as Paul Ehrlich’s The Population Bomb (1968) which contains ideas similar to those presented by Thomas Malthus 200 years ago.

See Learning Goal 1: Explain basic economics.

Malthus viewed a large population as a negative. However, many economists see a highly educated population as a valuable scarce resource. Countries like Japan and Germany have become economically successful in a postwar environment with large well-educated populations producing sophisticated high-value products.

See Learning Goal 1: Explain basic economics.

Adam Smith’s ideas were laid out in his seminal book, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith believed strongly in more “natural liberty” and less government intervention into the economy which was anathema to the ideas of Malthus. Smith argued that allowing people the freedom to own land and the right to keep profit would not create chaos as Malthus had argued, but rather would create greater resources for all.

See Learning Goal 1: Explain basic economics.

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See Learning Goal 1: Explain basic economics.

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See Learning Goal 1: Explain basic economics.

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1) Macroeconomics looks at the operations of a nation’s economy as a whole. Microeconomics looks at the behavior of people and organizations in markets for particular products or services.

2) To create wealth in an economy, it is better to teach a man to start a fish farm, and he will be able to feed a village for a lifetime.

3) The invisible hand is the term used by Smith to describe the processes that turns self-directed gains into social and economic benefits for all. To become wealthy, people working in their own self-interest producing goods and services hire others providing employment. They also tend to reach out to help the less fortunate over time.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

This slide gives students the opportunity to apply the concept of capitalism in the United States and analyze the impact government ownership of AIG, Fannie Mae and Freddie Mac will have on the future state of capitalism in the United States.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

See Learning Goal 2: Explain what capitalism is and how free markets work.

The four basic rights under a capitalist system are straightforward, but which of the four basic rights has been weakened in the United States over the past 30 years? When asked this question, rarely do students touch on the concept of eminent domain and the weakening of right to own private property due to the Kelo vs. New London Supreme Court case from 2005. If time permits students can explore this case and the potential impact the case may have on America capitalism.

See Learning Goal 2: Explain what capitalism is and how free markets work.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

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Learning Goal 2: Explain what capitalism is and how free markets work.

Circular Flow Model

In a free market economy, business activity involves two major players: individuals (households) who own the resources that are the inputs into the productive process, and businesses who use these inputs (factors of production) to create goods and services.

1. In the Resource Market (top part of the model)

a. Businesses demand resources.

b. Households own the resources (factors of production).

c. Income from providing these resources flows back to the households.

d. The price of these resources set by laws of supply and demand.

2. In the Product Market (lower part of the model)

a. Businesses use these resources to create goods and services.

b. Households (individuals) demand these goods and services.

c. Individuals use their income to purchase goods and services.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

Prices are determined by consumers negotiating with the sellers.

See Learning Goal 2: Explain what capitalism is and how free markets work.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

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See Learning Goal 2: Explain what capitalism is and how free markets work.

See Learning Goal 2: Explain what capitalism is and how free markets work.

Industrialized Nations’ Top Individual Tax Rate

• This slide compares the Industrialized Nations’ top individual tax rates.
• Students may be surprised at the difference between the rates in the U.S. and many other countries; for example the U.S. rate of 35% seems low compared to Belgium’s rate which exceeds 50%.
• To help explain the difference between the U.S. rate and Belgium’s higher rate, you can discuss some of the differences between capitalism and socialism. (Socialism believes that the government should provide increased services for people by redistributing income from the richer people to the poor. Explain to the student that socialist countries are given free education, free health care, and more employee benefits. Therefore they must pay higher taxes to support these benefits.)
• Point out the major disadvantages of socialism and the higher tax rate:

* Reduced incentives to work harder resulting in less innovation.

* Marginal tax rates are higher. Use the example of earning up to $20,000, at a tax rate of 40%. For each dollar you earn over $20,000, you could pay up to 85%, or eight-five cents of each dollar earned…. in taxes!

* Loss of professionally trained individuals due to higher taxes.

1) The four rights are: the right to own private property, the right to own a business and keep all that business’s profits, the right to freedom of choice, and the right to freedom of competition.

2) Decisions about what to produce and in what quantity are decided by the market, consumers sending signals about what to make, how many in what color, and so on.

3) Prices are determined by the economic concepts of supply and demand.

4) The four degrees of competition are:

Perfect competition – such as a farmer’s market where good are indistinguishable. Today, however, there are no good examples of perfect competition.

Monopolistic competition – such as fast-food restaurants where products are similar but consumers perceive the products to be different. Product differentiation is a key here.

Oligopoly – a situation where just a few major producers dominate a market such as tobacco, gasoline, automobiles, etc. A few sellers dominate because the initial investment to enter such a market is significant.

Monopoly – a situation where only one producer exists in a market. U.S. law prohibits the creation of monopolies.

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See Learning Goal 3: Compare socialism and communism.

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See Learning Goal 3: Compare socialism and communism.

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See Learning Goal 3: Compare socialism and communism.

See Learning Goal 3: Compare socialism and communism.

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See Learning Goal 4: Analyze the trend toward mixed economies.

See Learning Goal 4: Analyze the trend toward mixed economies.

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See Learning Goal 4: Analyze the trend toward mixed economies.

See Learning Goal 4: Analyze the trend toward mixed economies.

1) Socialists believe that the distribution of wealth should be more evenly distributed than in free-market capitalism. Government should be empowered to carry out the distribution of wealth.

2) Free education through college, free health care, and free child-care are some of the benefits of socialism. The key drawback of socialism is high taxes often causing a “brain drain” in the economy. Socialism also tends to inspire less innovation.

3) Most nations have drifted away from communism but North Korea, Cuba still espouse communism. Russia, Vietnam, and China still have some communist ideals in place.

4) Mixed economies have systems where the allocation of resources is made by the market and some by the government. Like most nations of the world, the United States is a mixed economy.

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

Share of World GDP (%)

• The GDP is the total value of goods and services produced by a country in a given year.
• Note the increase of the world’s GDP by emerging economies - over 50% increase since 1913.
• It is important for students to understand that increasing global GDP in the emerging world is not a “zero-sum game.” When emerging economies do well economically that translates into rising levels of prosperity for citizens in the emerging world and an increase in wealth in the developed world.
• Ask students - How do rising levels of wealth in the emerging world impact the United States? (Rising levels of wealth lead to greater levels of export sales from companies in the United States as well as greater peace among nations.)

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

U.S. Gross Domestic Product

• In 2007, the U.S. gross domestic product was $14,074 billion.
• This compares to the GDP of $ 5,803 billion in 1990 and $ 2,789 billion in 1980. As can be seen on the slide the U.S. GDP has grown over 400% since 1980.

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

Playing Catch Up

• America is often referred to as “the engine that runs the world’s economy.” It is easy to see the truth in this statement with gross domestic product far exceeding the four countries listed on the slide.
• While China has grown dramatically since 1975, their economy is still dwarfed by that of the United States.

3. Much is made of the economic growth of China, India, Russia and Brazil, but students must understand the sum of these four countries gross domestic products is approximately half that of the United States.

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

While the term unemployment seems simple enough, the Bureau of Labor Statistics (BLS) has a very specific definition. According to the BLS unemployment is the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks. If that was not confusing enough there are four types of unemployment which students are often surprised to discover.

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

Unemployment Rate of the U.S.

• Unemployment is defined as the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks.
• The unemployment rate in the United States over the past 50 plus years has been as low as 3.9 percent, but more recently has climbed past 9 percent with predictions that it is likely to climb higher.
• Although the unemployment rate is climbing in the United States it still has a long way to reach the unemployment rate in Zimbabwe which stands at 80 percent.

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

When discussing inflation, disinflation, deflation and stagflation, introducing the term hyperinflation is particularly interesting to students. Historical examples of countries suffering from hyperinflation post-World War I and currently Zimbabwe bring this topic to life.

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

After discussing hyperinflation in the previous slide students can appreciate the importance of monitoring a nation’s inflation rate to prevent it from spiraling out of control. As inflation is increasing it acts as a hidden tax increase eroding the purchasing power of the population.

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See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

Yes, it is true that a recession is two or more consecutive quarters of contracting gross domestic product, but students will be interested in knowing that for a recession to be officially labeled a recession it must be declared by the National Bureau of Economic Research. Their website, www.nber.org, provides numerous resources to further explain this part of the business cycle.

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See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

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See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

How Much is the National Debt?

• Discuss with the class the size of the national debt and what impact this has on the economy. (Increased borrowing by the government takes money out of the consumer and business markets, impacting the cost of borrowing.)
• The national debt has continued to increase roughly $3.8 billion per day since September 28, 2007.
• On a per person basis, each citizen’s share of this debt is roughly $36,000.
• A family of four shares the debt burden of about $144,000.

See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

What Can A ____ Dollars Buy?

• Before showing the slide, ask students, “If you were a rich, generous person who wanted to treat President Obama and his 2,000 Secret Services members to an Egg McMuffin every morning, how many days could you treat them if you decided to spend a million dollars? A billion dollars? A trillion dollars?”
• Students are usually surprised to see how much a million, billion, or trillion dollars can buy.

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See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

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• The three key economic indicators are the Gross Domestic Product (GDP), the unemployment rate, and the price indexes. The U.S. GDP is approximately about $14 trillion. Our high GDP allows citizens to enjoy a high standard of living. In 2000, the U.S. reached it lowest unemployment rate in over 30 years. However, the recession of 2008-2009 may lead unemployment to at least 10 percent. The consumer price index (CPI) has not risen to high levels keeping inflation in check. However the recession has caused fears of deflation.
• A recession is two or more consecutive quarters of decline in the GDP. A depression is a severe recession, usually accompanied by deflation.
• Fiscal policy refers to the government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
• Monetary policy is the management of the nation’s money supply and interest rates. The Federal Reserve controls the money supply in the United States.

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