fiscal and monetary policies
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Fiscal and Monetary Policies. The Government’s Role In the Economy. DRILL: What is the message the cartoonist is implying?. 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) - PowerPoint PPT PresentationTRANSCRIPT
Fiscal and Monetary Policies
The Government’s RoleIn the Economy
DRILL: What is the message the cartoonist is implying?
3 Goals of Economic Policy We have a mixed-market economic system Government’s role in the economy is to:
1. Promote steady growth (grow our economy)2. Keep people employed (full employment)3. Keep inflation low (price stability)
The Business Cycle:
The Business Cycle: Vocab! Peak: _________________________________ Trough: _______________________________ Expansion (Recovery):___________________________________________________________ Contraction: ___________________________________________________________________ Recession: ____________________________
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
Fiscal Policy & Monetary Policy 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 Congress and the President use taxes
and government spending to achieve economic growth, full employment, and stable prices
Expansionary & Contractionary Fiscal Policy 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 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
Advantages of Fiscal Policy Helps the gov’t achieve its economic
goals:• Growth (GDP)• Stability (Prices)• Full employment
Monetary Policy
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
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)
Reserve Requirement – the amount of $ banks must keep in their vaults
“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
Discount Rate – the interest rate the “Fed” charges other banks
“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
Open Market Operations – people/businesses buy treasury bonds from the “Fed” “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
Advantages of Monetary Policy Helps the gov’t achieve its economic
goals:• Growth (GDP)• Stability (Prices)• Full employment