Fiscal Policy

Fiscal Policy

Fiscal Policy: The use of government expenditure (spending) and revenue collection (taxation) to influence the economy.

Who makes fiscal policy in the United States?

The President and Congress (State Reps and Senators).

Fiscal Policy

Two Tools of Fiscal Policy:

1. Taxation2. Government Spending

If the economy is slow, the gov’t will want to increase the money supply, so it will increase government spending and decrease taxes…and vice versa.

Fiscal Policy

Why use fiscal policy?

To stabilize the natural business cycle.

Fiscal Policy How does the

Government get money?

Taxes!!!

What does the government spend money on?

Lots of things: Military, highways, education, welfare, policemen, firemen, social security, etc.

3 Stances on Fiscal Policy

1. Neutral: Government spending is completely covered by taxes.

2. Expansionary: Government spending is greater than tax revenue.

3. Contractionary: Government spending is lower than tax revenue.

Monetary Policy

Unemployment

Unemployment Rate: The percentage of people aged 16 and older who are actively looking for a job.

In 2000, the national unemployment rate was 4%.

Today, it is 9.1%. In Arizona, the unemployment rate is

almost 10%.

Monetary Policy

Monetary policy is how the United States uses the Federal Reserve to stabilize the natural business cycle…

1. Controlling the rate of inflation

2. Combating unemployment

Monetary Policy

Ok, let’s back up…A few things you need to know…

1. Inflation: A general increase in prices and fall in the purchasing power of money

2. Federal Reserve System: created 1913

- USA divided into 12 districts…each has a federal reserve bank

- all US banks belong to the system

Monetary Policy

lend to member banks Set interest rates on what banks

charge one another for loans- consumer int. rates are

“pegged” to that rate Adjust money supply

in the economy.

Monetary Policy

Who Controls Monetary Policy in the US?

A: The Federal Reserve Bank

The Chairman of “The Fed” is Ben Bernanke

Monetary Policy

Two tools the Federal Reserve uses to control the money supply, thereby controlling inflation and unemployment:

1. Manipulating interest rates2. Buying or selling government bonds

What is an interest rate???What is a government bond???

Monetary Policy

If “The Fed” wants to increase the money supply, it will decrease interest rates and buy government bonds.

If “The Fed” wants to decrease the money supply, it increase interest rates and sell government bonds.

Monetary Policy

If prices are being pulled higher by increased demand (inflation!), one solution would be to lessen demand.

Any ideas how to discourage demand? How could the Fed make people less willing to spend??

Monetary Policy

Make it harder to borrow money to buy things on credit by making the cost of money more expensive. In other words…

RAISE INTEREST RATES!

If people are not buying products, the Fed will decrease interest rates…making it cheaper to borrow $.

Review

Other than increasing interest rates, how might the Federal Reserve control inflation?

Answer: Selling gov’t bonds…this works by decreasing the amount of $ in the country b/c people will give their $ back to the gov’t in exchange for bonds.

Remember, bonds are simply I.O.Us …the gov’t is borrowing $ from you!

Review

So, The Federal Reserve can slow down inflation by…

1. Raising the interest rates. 2. Selling Government bonds.

The Opposite is also true.

Monetary Policy

How does the Fed control unemployment?

It reduces interest rates…why?

Because if its “cheaper” to borrow $, businesses will do just that and have more $ to expand their business and hire new workers.