1. Trying to Solve the Economy’s Problems
Fiscal Policy - means the government increases or decreases taxes and spending to unemployment and inflation.

2. Fiscal Policy - means the government increases or decreases taxes and spending to unemployment and inflation.
Using Fiscal Policy inn order to decrease unemployment the government might:
A. Increase spending - build new roads. This means hiring construction workers. OR
B. Decrease taxes - people would have more money to spend. Businesses would have to produce more goods, which means hiring more workers.
Using Fiscal Policy in order to control inflation the government might:
Decrease Spending - stop building new roads. Fewer jobs will be available. Workers have less money to spend.
Increase Taxes - If taxes go up people have less money to spend onthemselves.

3. What Economist’s think of Fiscal Policy
Most say that it takes too long for Fiscal Policy to have an effect on the economy. There is no evidence that it actually works!!

4. Check Your Understanding
Suppose that there is high unemployment. The government wants fiscal policy to try to create jobs. What two things might the government do?
What two things might the same government do to slow down inflation?
Why do some economists think fiscal policy does not work very well?

5. Monetary Policy
Many Economists believe that controlling the money supply is the key to controlling inflation and unemployment. They believe in Monetary Policy.
Monetary Policy - means that the Federal Reserve Bank takes steps to control unemployment and inflation.

6. Monetary Policy (cont’d.)
In periods of High Unemployment the Federal Reserve increases money supply. This will lead to more goods and services being produced - and more jobs.
In periods of High Inflation, the Federal Reserve will want to decrease money supply. Fewer dollars in the economy means that consumers will spend less and halt rising prices.
Check Your Understanding
What is meant by Monetary Policy?
Why does more money in the econom help to reduce unemployment?
Why does less money in the economy help to reduce inflation?

7. How the Federal Reserve Controls Money Supply
How does the Federal Reserve control money supply?
They encourage banks to lend more money to it’s customers by:
1. Lower the Discount Rate. The Discount Rate is the rate that the Federal Reserve Charges when banks want to borrow money.
2. Buying and Selling Government Bonds.
3. Lower the Reserve Requirement.

8. Supply Side Economic Theory
Supply Side Economic Theory - they believe that by cutting taxes and government expenditures the amount of goods and services produced in the economy will increase.