1. How does the Gov’t address the Problems with the Business Cycle (Inflation and Recession) 1. Fiscal Policy 2. Monetary Policy

2. Fiscal Policy Definition: Using taxing & gov’t spending to stabilize the economy. Who is in charge of Fiscal Policy? 1. The President – proposes a budget and suggests tax policy 2. Congress - approves President’s budget and is responsible for tax policy

3. 2 Tools used to in Fiscal Policy 1. Taxes - Increase or Decrease 2. Gov’t Spending (budget) - Increase or Decrease

4. FISCAL POLICY Slow Economy (Inflation) Grow Economy (Recession) Decrease Taxes Increase Spending Increase Taxes Decrease Spending

5. Monetary Policy Definition: Controlling the amount of money and credit available to help stabilize the economy. Who is in charge of Monetary Policy? 1. Federal Reserve

6. What is the Federal Reserve (FED)? It is the central banking system for the United States (MAMA BANK) If the commercial “baby” banks (Bank of America, Wachovia) need to borrow money they ask to the Federal Reserve. Federal Reserve tells the baby banks what to do.

7. 3 Tools used in Monetary Policy Discount Rate - The interest rate the Fed charges a commercial “baby” bank if they borrow money to loan to customers. Reserve Requirement - The amount of money that “baby” banks must have in their vaults at the end of the day. Open Market Securities (Bonds) - Bonds the “Fed” buys or sells to the “baby” banks.

8. Monetary Policy Slow Economy (Inflation) Grow Economy (Recession) Increase Reserve Requirement Increase Discount Rate Sell Securities Decrease Discount Rate Buy Securities Decrease Reserve Requirement

9. Review Fiscal Policy Definition: Who is in charge? RecessionInflation Taxes Spending Monetary Policy Definition: Who is in charge? RecessionInflation Discount Rate Reserve Requirement Open Market Operations