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Fiscal and Monetary Policy

Fiscal and Monetary Policy. Chapters 12, 13 and parts of 29 Time Period 3 weeks. Fiscal Policy. Fiscal policy is done by CONGRESS—not the FED Stabilization is done by G and T collection Can increase employment or reduce inflation

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Fiscal and Monetary Policy

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  1. Fiscal and Monetary Policy Chapters 12, 13 and parts of 29 Time Period 3 weeks.

  2. Fiscal Policy • Fiscal policy is done by CONGRESS—not the FED • Stabilization is done by G and T collection • Can increase employment or reduce inflation • Everything equal, what puts more money in the economy, G or a decrease in T?

  3. The Employment Act of 1946 • Congress proclaimed gov’t role in promoting max. employment, production and purchasing power • Created the Council of Econ. Advisors to advise the President • Created the Joint Economic Committee of Congress to investigate econ. problems.

  4. Discretionary Fiscal Policy • = changes to G or T are at the option of Congress • Two types = expansionary and contractionary

  5. Expansionary Policy • Used to combat recession • Increase G • Decrease T • If budget is balanced, a budget deficit is created • Goal is to shift AD to the right PL SRAS PL2 PL1 AD2 AD Y1 Y2 GDPr

  6. Contractionary Policy • Used to lower inflation • A decrease in G • An increase in T • Goal is to shift AD to the left by taking money out of the system PL SRAS PL1 PL2 AD AD2 Y2 YI GDPr

  7. Financing Deficit Spending • 1. borrow from the public • Sell bonds to the public • Competes with private businesses • With this added demand for $, interest rates may increase and private Ig may decrease

  8. 2. Money Creation • FED loans money directly to the gov’t • Does not decrease private Ig or consumption • Could increase inflation

  9. What to do with a Surplus • 1. Pay off public debt • Buy back bonds • Puts $ back into the system, increases consumption • May offset contractionary policy that created the surplus

  10. 2. stand idle • Withholds purchasing power • No chance of inflation

  11. Built In Stability--Automatic • 1. Income Tax • As income increases, people pay more taxes. This limits the increase in DI and C. • 2. Unemployment compensation • The income of unemployed does not fall to zero. UC provides a base level of income. • 3. Stocks and Bonds • Dividends do not follow the swings of the business cycle. Bond payments are established at the time the bond is purchased

  12. Group work • There will be 6 groups • You will decide how to split up the work as a group • Write/type bullet points on important info • At least half of the group will present • Someone will type notes and email it to me TONIGHT so I can make copies for block day

  13. Group1 • Page 229-230 • Built-In Stability • Stop at Evaluating Fiscal Policy

  14. Group 2 • Pages 230-232 • Evaluating Fiscal Policy • Stop at Problems, Criticisms and Complications

  15. Group 3 • Pages 233-234 • Problems, criticisms and complications • Stop at offsetting state and local finance

  16. Group 4 • Pages 234-235 • Crowding-Out Effect • Stop at Fiscal Policy, AS and Inflation • Please include a graph

  17. Group 5 • Pages 235-236 • Fiscal Policy in the Open Economy • Stop at Supply-Side Fiscal Policy

  18. Group 6 • Pages 236-238 • Supply-Side Fiscal Policy

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