1. Please Do Now:
• Reflect on the roles of the President and
Congress
• How do they each get involved in tax and spend
legislation?
• How do executive decisions impact our fiscal budget?
• How is government able to influence consumer
expenditures? (What can government do to increase or
decrease levels of economic activity within the nation?)

2. Three Competing
Economic Philosophies
• Classical Economics
• Keynesian Economics
• Supply Side Economics
• How does each affect the economy (in theory)?
• How they stimulate economic contraction & expansion

3. Classical System - 18th Century
• Government had no role in management of the
economy – “Laissez-faire” or “do nothing”
• The economy regulates itself - it has natural safety
valves that protect against difficulties
• Adam Smith - Wealth of Nations - "invisible hand"
regulates the marketplace
– self-interest, competition, guide supply & demand -
(re)allocates resources in the economy
• “ The natural effort of every individual to better his own condition ... is
so powerful, that it is alone, and without any assistance capable of
carrying on the society to wealth and prosperity…”

4. Classical Theory
• Classical Economic theory
– When prices rise – we buy less (demand goes down)
– surpluses – prices drop – we buy more
– When we buy less, businesses lay off workers – less
people with jobs – less buying – lower production
-recession or depression
• Eventually, businesses drop prices to point where people
buy stuff – businesses make $ - businesses hire more
workers – workers spend $ - Depression over

5. Keynesian Economics:
“Demand Side Economics”
• John Maynard Keynes (early 1900s)
– Economies unstable and always changing
– Inflation (during boom times) caused by
DEMAND – Too many $ trying to buy too few
goods
– Deflation (during busts) caused by decline in
demand
– Economies will NOT balance themselves out in
a timely manner
• Too many people will get hurt waiting for
the economy to adjust to imbalance in
Supply & Demand
• Government must step in to correct the inherent
instability of the economy

6. Fiscal Policy (Keynes view)
• In a recession (low GDP & spending) Government must
increase demand by spending more - lowering taxes;
lowering interest rates; increasing welfare
– Examples: FDR’s New Deal programs, Bush/Obama’s “Stimulus Package”
• “Deficit Spending” is good
– When in debt, govt should SPEND money and tax less
to get out of debt
– Explain how this works.

7. Supply Side Economics
• Believes inflation caused by lack of supply
• Tax less, regulate less, AND cut Government
Spending
– “Trickle Down Economics”
– Put more $ in the hands of the producers
• They will make more stuff and hire more workers, who will
spend more and buy more
– E.g. Ronald Reagan in 1980s (“Reaganomics”)
– E.g. Proposed repeal of healthcare legislation coupled
with recent tax (break) legislation

8. Taxes vs Spending
• What do you think is the best approach to
dealing with our deficit?
• What should our fiscal policy be?

9. For Homework:
• Read pgs 20-30 in The Instant Economist and
answer the following questions in your notebook
• 1. How can the Fed effect the economy?
2. How do deficits effect our economy and
what can we do about it - or should we?
• DUE Thurs., 2/3

10. For Homework:
• Read pgs 20-30 in The Instant Economist and
answer the following questions in your notebook
• 1. How can the Fed effect the economy?
2. How do deficits effect our economy and
what can we do about it - or should we?
• DUE Thurs., 2/3