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Supply Side and Demand Side Economics

Please enable Youtube. Content covered Keynesian Economics, Demand Side Fiscal Policy, Spending multiplier effect, John Maynard Keynes, Supply Side Fiscal Policy, Laffer Curve, Reaganomics

Benjamin Geiger

on 17 April 2013

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Transcript of Supply Side and Demand Side Economics

Supply Side Keynesian Economics Explained Keynes believed that government action was necessary to stimulate investment in the economy when businesses are unable to do so.

The government should be active in providing stability to the economy, and should be less concerned with balancing their budget.

Keynes used the spending multiplier effect to illustrate his argument.

Spending Multiplier Effect: a change in spending is multiplied into a larger change in GDP. Demand Side Policies Successes: Government spending during the Great Depression, and World War II stimulated aggregate demand. Supply Side Economics Supply Side Economic principals are based on the works of multiple economists, from Adam Smith to Austrian Economist Friedrich Hayek. These economist believe that the government should reduce their role in the economy and allow the economy to self correct. Supply Side Explained A proponent of supply side economics is Arthur Laffer, an American economist, who studied tax revenues. After his studies he create a graphic representation of his findings; the Laffer Curve, it demonstrates that as taxes rise people are less willing to spend and that the same amount of money would be collected by a lower tax rate. Additional Examples As you read each additional example indicate if you believe they are supply side or demand side policies. Provide three clear examples from each passage that validates your claim.

Once complete, identify which political party currently supports which set of policies.

Finally there will be an opportunity for you to explain
which policy is better to enact during a recession. Please include supporting facts from the Prezi and Additional Examples. Demand Side Fiscal Policy Supply Side vs. Demand Side Discretionary fiscal policy involves actions taken by the government to stabilize the economy. The government must budget for this type of spending each year. However, the government has automatic stabilizers that are tied to mandatory spending such as Social Security, and unemployment.
What happens when the business cycle is contracting, cyclical unemployment is on the rise, and automatic stabilizers are not enough?
In a time of recession there are currently two schools of thought to correct the economy. Each side emphasizes one portion of expansionary fiscal policy. Each side is championed by well known economists and has compelling arguments. Demand Side Economics Demand Side Economics was founded during the
Great Depression by a British Economist John Maynard
Keynes. Often referred to as Keynesian Economics, the
philosophy holds that the government must stimulate the economy during times of a recession. The key to Demand Side Economics is that the government
must increase spending. Failures: Excessive growth in demand can lead to inflation. For example, in the 1970's president Carter's bailout of Chrysler. The increased spending caused inflation and a stop to wage increases. The key to Supply Side Economics is that the government
reduce taxes, regulations and government spending on social programs. These tax breaks coupled with less regulations on business allow businesses to create more jobs, which
improves the economy Supply Side Policy In Action Success: Following Stagflation in the late 1970s
Ronald Reagan took office as President in 1980. He urged Congress to lower taxes, and decrease social
spending, which allowed the economy to bounce back. Failures: During the onset of the Great Depression
Herbert Hoover took a supply side approach that
led economic disaster. Details and Examples of President Bush's (Republican) Tax Cut Plan
President Bush contends that his $550 billion tax cut proposal will stimulate the economy by allowing Americans to keep more of their own money to spend, save, and invest, thus creating new jobs.
The Bush proposal would provide:
• Across the board tax rate reductions that would show up in taxpayer's paychecks soon after Congress passes his plan;
• Accelerated relief from the marriage penalty for working couples;
• An increase in the child tax credit from $600 to $1,000 per child. Families would get that extra $400 per child for 2003 in a check mailed to them weeks after the bill is signed.
• An end to double taxation of dividends. The White House believes this provision will spur investment that is vital for creating new jobs; in fact, it is estimated to create nearly one-third of the new jobs that will result from the President's plan. White House economic analysts say it will also give the stock market a much needed boost, benefiting everyone who owns a 401(k) or other investment account.
• Incentives for small businesses to grow. Small businesses-America's engines of job creation-will greatly benefit under the President's plan, which triples the amount they can write off on the purchase of new equipment such as computers and machinery. Obama (Democrat) Offers a Transit Plan to Create Jobs

Doug Mills/The New York Times
MILWAUKEE — President Obama, looking to stimulate a sluggish economy and create jobs, called Monday for Congress to approve major upgrades to the nation’s roads, rail lines and runways — part of a six-year plan that would cost tens of billions of dollars and create a government-run bank to finance innovative transportation projects.
With Democrats facing an increasingly bleak midterm election season, Mr. Obama used a speech at a union gathering on Labor Day, the traditional start of the campaign season, to outline his plan. It calls for a quick infusion of $50 billion in government spending that White House officials said could spur job growth as early as next year — if Congress approves.
That is a big if. Though transportation bills usually win bipartisan support, hasty passage of Mr. Obama’s plan seems unlikely, given that Congress has only a few weeks of work left before lawmakers return to their districts to campaign and that Republicans are showing little interest in giving Democrats any pre-election victories.
Central to the plan is the president’s call for an “infrastructure bank,” which would be run by the government but would pool tax dollars with private investment, the White House says. Mr. Obama embraced the idea as a senator; with unemployment still high despite an array of government efforts, the concept has lately been gaining traction in policy circles and on Capitol Hill.
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