Fiscal and Monetary Policy

What it is... Ways the government can try to influence the economy… Expansionary/contractionary

Why would we want to contract the economy?

Fiscal Policy Controlled by the national government (Congress) Tools: ●Taxes (Expansionary/Contractionary) ●Government Spending (Expansionary/Contractionary)

Expansionary Fiscal Decrease taxes…Why? More money in peoples pockets Increase government spending…Why? The government is buying more stuff… Keeps GDP up unemployment down

Contractionary Fiscal Increases taxes…Why? Less money for people to spend Decrease government spending…Why? Government doesn’t buy as much stuff, people do more of the buying on their own

Monetary Policy Controlled by the Federal Reserve (they are the banks for banks) Tools: ●Discount Rate (Interest rate for banks) Expansionary/Contractionary ●Open Market Operations (Buying/selling bonds) Expansionary/Contractionary ●Required Reserve Ratio (How much banks need to keep on hand) Expansionary/Contractionary

Expansionary Monetary Lower the discount rate…why? Lower interest rate means it is easier to pay back barrowed money Buy bonds…why? Money is going into the economy and bonds are coming out Lower the required reserves ratio…why? Banks don’t have to keep as much money on hand, so they can loan more

Contractionary Monetary Raise the discount rate…why? Higher interest rate means it is harder to pay back barrowed money Sell bonds bonds…why? Money is being taken out of the economy and bonds are being put in Raise the required reserves ratio…why? Banks have to keep more money on hand, so they can’t loan as much

So how does the government do this? Is it all expansion or contraction? Typically not, it will be a combination of the two.

How it works... Activity: Please take out your notes on Fiscal and Monetary Policy.

Rows ●In your PODS: ●The group will need 4 sheets of paper (2 pages front/back) ●On the sheets of paper, AND LARGE ENOUGH FOR ME TO READ FROM THE FRONT OF THE ROOM please write, and make them pretty: o Monetary Expansionary o Monetary Contractionary o Fiscal Expansionary o Fiscal Contractionary

Situations ●The government increases taxes for the lowest income earners ●The Federal Reserve announces they are going to cut their bond buying program by 20 billion dollars ●The government announces they are going to roll out an interstate highway improvement plan; which is going to cost 2 billion dollars

Situations ●The government decides to give everyone an extra $800 tax credit ●OPEC (organization of petrolieum exporting countries) decides to raise prices ●The Federal Reserve decreases the required reserves for banks ●An alternative fuel source for cars is created o How might the government influence this?

Situations ●The Federal Reserve lowers the discount rate. ●The Federal Reserve increases the discount rate, while increasing their bond buying program. ●The government gives tax breaks to the wealthy, and businesses, while decreasing government spending. ●The Federal Reserve lowers the discount rate, while the government increase taxes ●The Federal Reserve raises the required reserves, while the government increase spending.