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Preview Activity. The year was 1974. The US was in a recession. GDP declined during the past 3 out of 4 quarters. Household consumption dropped by $40 billion. 2 million more people were unemployed. No relief was in sight!

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Preview Activity

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  1. Preview Activity The year was 1974. The US was in a recession. GDP declined during the past 3 out of 4 quarters. Household consumption dropped by $40 billion. 2 million more people were unemployed. No relief was in sight! • Examine the list of possible actions that policymakers could take to help the economy & predict what you think the effect of each action might be. Choose from these effects: Effect AEffect B Stimulate Slow down the economy economy • Write the letter A or B for each possible action on handout, indicating which effect you think the action would have on the economy.

  2. Fiscal & Monetary Policy Essential Questions: How does fiscal policy work? How does monetary policy work?

  3. Policy-an official plan of action adopted by a government

  4. The “FED…” • Federal Reserve-often called the “FED” The central bank of the United States, which regulates the U.S. monetary and financial system. • The System is composed of a central agency in Washington, D.C. (the Board of Governors) and 12 regional Federal Reserve Banks in major U.S. cities.

  5. Fiscal Policy on Youtube • http://www.youtube.com/watch?v=1qhJPqyJRo8

  6. The origins of Modern Fiscal Policy and Monetary Policy Fiscal policy – uses the government‘s power to tax and spend, to get an economy moving again or address inflation. • Policymakers use fiscal & monetary policy to keep the economy running smoothly.

  7. Monetary policy – uses the Federal Reserve’s power to regulate the money supply and interest rates to dampen inflation or to stimulate growth.

  8. Before the Depression, the government rarely intervened in the economy. • John Maynard Keynes believed that… -government spending could stimulate demand during recessions -fiscal policy could be used to fight recession (including deficit spending).

  9. Milton Friedman believed… -controlling the money supply was key to stabilizing the economy. • Monetarismpromotes the use of monetary policy to expand and contract the money supply.

  10. What tools are used to stabilize the economy? Expansionary Fiscal Policy increases economic activity by increasing government spending and/or cut taxes.

  11. Contractionary Fiscal Policy decreases economic activity by raising taxes and/or decreasing government spending.

  12. What tools does monetary policy use to stabilize the economy? • The Federal Reserve uses monetary policy to stabilize the economy. • An easy-money policy speeds the growth of the money supply to prevent a recession. • A tight-money policy slows the growth of the money supply to prevent inflation.

  13. What factors limit the effectiveness of fiscal and monetary policy? Several factors limit effectiveness, including time lags, inaccurate forecasts, and concern about national debt. The size of the debt causes concern in: • Government bankruptcy • Foreign-owned debt • Burden on future generations • The crowding out effect

  14. The Crowding Out Effect http://www.youtube.com/watch?v=RGlt0nEQdRI

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