Fiscal and Monetary Policies

1. Fiscal and Monetary Policies The Government’s Role In the Economy

2. DRILL: What is the message the cartoonist is implying?

3. 3 Goals of Economic Policy • We have a mixed-market economic system • Government’s role in the economy is to: • Promote steady growth (grow our economy) • Keep people employed (full employment) • Keep inflation low (price stability)

4. The Business Cycle:

5. The Business Cycle: Vocab! • Peak: _________________________________ • Trough: _______________________________ • Expansion (Recovery):____________________ _______________________________________ • Contraction: ____________________________ _______________________________________ • Recession: ____________________________

6. ADD THESE:Economic Indicators • GDP – Gross Domestic Product • Measures how well the economy is doing • Total output (industry & services) of a country in one year • CPI – Consumer Price Index • Measures inflation • Unemployment Rate – unemployed ppl • Measures the # of ppl who are out of work that want a full-time job

7. Congress and the President use taxes and government spending to achieve economic growth, full employment, and stable prices Federal Reserve uses reserve requirements, discount rate, and open market operations to achieve economic growth, price stability, and full employment Fiscal Policy & Monetary Policy

8. Fiscal Policy • Congress and the President use taxes and government spending to achieve economic growth, full employment, and stable prices

9. Decrease taxes – people give less $ to the gov’t, so: People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase Increase taxes – people give more $ to the gov’t, so: People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease Expansionary & Contractionary Fiscal Policy

10. Increase gov’t spending – will create more jobs, so: People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase Decrease gov’t spending – will create less jobs, so: People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease Expansionary & Contractionary Fiscal Policy

11. Advantages of Fiscal Policy • Helps the gov’t achieve its economic goals: • Growth (GDP) • Stability (Prices) • Full employment

12. Monetary Policy

13. Monetary Policy • Federal Reserve uses reserve requirements, discount rate, and open market operations to achieve economic growth, price stability, and full employment • Reserve requirements • Discount rate • Open market operations

14. The Federal Reserve • It is the central bank of the United States • It’s job is to balance between rapid growth and recession • If money and credit grows too rapidly, inflation can result • If money and credit grows too slowly, it can cause a recession • Uses three main tools: • 1. Reserve Requirement • 2. Open Market Operations • 3. The Discount Rate (Interest Rates)

15. “Fed” decreases the reserve requirement, so: Amount of $ the banks can lend people goes up Amount of $ in circulation goes up People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase “Fed” increases the reserve requirement, so: Amount of $ the banks can lend people goes down Amount of $ in circulation goes down People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease Reserve Requirement – the amount of $ banks must keep in their vaults

16. “Fed” decreases the discount rate – ordinary banks borrow more $ from the “Fed”, so: Amount of $ the banks can lend people goes up Amount of $ in circulation goes up People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase “Fed” increases the discount rate – ordinary banks borrow less $ from the “Fed”, so: Amount of $ the ordinary bank can lend people goes down Amount of $ in circulation goes down People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease Discount Rate – the interest rate the “Fed” charges other banks

17. “Fed” sells treasury bonds, causing people/businesses to buy them, so: Amount of $ in circulation goes down People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease “Fed” buys treasury bonds, causing people/businesses to sell them, so: Amount of $ in circulation goes up People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase Open Market Operations – people/businesses buy treasury bonds from the “Fed”

18. Advantages of Monetary Policy • Helps the gov’t achieve its economic goals: • Growth (GDP) • Stability (Prices) • Full employment