Stabilizing the Economy

2. Stabilizing the Economy

3. Fiscal Policy • Fiscal policy refers to the federal government's use of taxing and spending policies to help stabilize the economy. • The president and congress can raise or lower taxes or increase or decrease government spending.

4. Effects of Fiscal Policy • Cut Taxes—puts more money in consumers’ pockets. They in turn spend more and spur the economy. • Raise taxes—consumers have less money to spend and the economy slows down. • Increasing government spending can create jobs and keeps money flowing. • Decreasing government spending can have the opposite effect. Slowing down the economy.

5. Increasing government spending can create jobs and keep money flowing. • Decreasing government spending can have the opposite effect • Slowing down the economy • Fiscal Policy is slow and it can take several months to take effect.

6. Monetary Policy • Monetary Policy—the attempt to stabilize the economy by regulating the money supply. • Trying to regulate the Money Supply is one way to regulate the ups and downs of the economy. The money supply is the total amount of money in circulation at any given time. • Monetary Policy is carried out by the nation’s central bank—The federal Reserve

7. The Federal Reserve System • This is the central bank of the United States, it provides financial services to the banking industry and the government. It also regulates banks to make sure they follow the laws. • Federal Reserve Board—A committee that consist of seven members who are nominated by the president and confirmed by the senate.

8. The Fed and the Money Supply • The Fed sets monetary policy by taking action to increase or decrease the money supply. • The money supply affects the amount of credit available. • The amount of credit affects business expansion and consumer purchasing.

9. When the FED increases the money supply credit is less costly which in turn encourages consumers to increase spending, businesses to borrow money for expansion increases jobs and growth takes place. • When the FED decreases the money supply, credit becomes harder for both consumers and businesses and economic growth takes place.

10. When the FED decreases the money supply, credit becomes harder for both consumers and businesses and economic growth is slowed. • This is a way to slow inflation. • The Fed can affect the money supply by selling or buying government securities in the open market. This is called the OPEN MARKET OPERATIONS>

11. Open Market Operations • The Fed can affect the money supply by selling or buying government securities—stock, bonds, and other financial assets • Open market operations have an effect on the federal fund rate. This is the interest rate at which banks lend money to one another overnight. • When the Fed decreases the money supply by selling securities, the federal funds rate goes down. • Changes in the federal rate tend to trigger changes in the interest rate.

12. The Discount Rate • The interest rate that banks pay to the FED is called the discount rate. The Fed has the power to set the discount rate.

13. Reserve Requirements • When a person makes a deposit into a checking or savings account, your money can then be used by the bank for lending to business and individuals. • Federal law states that banks can not lend out all the money that they take in. • The portion the government says must be keep is referred to as the reserve requirement. Effect on Money supply.

14. Effects on Consumers • Fed policy effects you in several areas: • What you’ll pay for goods and services. • Your ability to get credit and the interest rate you pay for credit. • What you’ll earn in interest. • Your job stability and the wages you are paid.