The 2008 Bailout and Fiscal Policy

Remember

• Business Cycles – We were in recession

07 --08 --09--10

Why do we need a bailout?

• Businesses were failing due to stock market crash– Mostly bulky large

businesses which were wrapped up in the stock market with options, derivatives, futures, etc.

• Entire industries and countries were collapsing– GDP declining

Too big to fail?• The government determined

that some companies were too big to fail– General Motors– Ford Motors– Chrysler– Bank of America– Merrill Lynch– AIG

• What makes a company too big to fail?

Fiscal Policy

• Fiscal policy is the government expenditure and revenue collection to influence the economy– Expansionary• Government spends more than it has to boost the

economy– Put money in people’s pockets

– Contractionary• Government increases taxes to slow down the economy

– Take money out of people’s pockets

Fiscal Policy

• Contractionary Expansionary

Aggregate Supply/Demand

• The United States • Aggregate refers to the entire economy instead of one sector– Instead of supply and

demand for pumpkins, this is overall supply and demand

GDP

How expansionary fiscal policy affects Agg D and S

• By pursuing expansionary fiscal policy, the government can boost demand

• Giving people money is increasing their income– Remember that income

is a determinant of demand

GDP

AD’

How expansionary fiscal policy affects Agg D and S

• Expansionary fiscal policy has 2 effects:–1. Increases

output/GDP–2. Increases prices• This is called

inflationGDP

AD’

Mr. Garcia

RULES!!!!!

This Week

Monday – Tuesday – BailoutWed – Fiscal PolicyThurs. – Book WorkFriday – ArticlesMonday – Review of Cycles and Fiscal Policy/QuizTuesday – Monetary Policy ActivityWednesday – Monetary Policy