Monetary and Fiscal Policy Analysis

Monetary and Fiscal Policy Analysis

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Instructions

• This lesson will present policy examples

• You will identify the policies as:

• Fiscal (done by the government) or Monetary (done by the Federal Reserve)

• If Fiscal, is it taxing or spending?

• If Monetary, is it increasing or decreasing the money supply?

• Is it demand side or supply side?

• What economic goal is it targeting?

Policy Example 1

Voters in Wayne county Michigan approve a government plan to levy a special tax to pay for a new stadium for the local MLS team.

Multiple Choice

Is this monetary policy or fiscal policy?

• Monetary Policy

• Fiscal Policy

Multiple Choice

This policy is a fiscal policy, what area is it FIRST going to affect?

• Taxing

• Spending

Multiple Choice

Is this policy targeted at the demand side or the supply side of the economy?

• Demand Side

• Supply Side

• Both

Multiple Choice

Which economic goal is this policy MOST likely to target?

• Economic Growth

• Price Stability

• Full Employment

Explanation

This is a fiscal policy that affects both taxing and spending. It first is a specific tax for an infrastructure upgrade (building a football/soccer stadium). The money from this new tax will be spent on helping to pay for building that stadium. This is a subsidy, therefore it is a supply-side policy. The idea behind public financing of stadiums is that it will draw consumers and new businesses to that region, and that increased economic activity will fuel economic growth which will then fuel more tax revenue. In reality, the economic growth and increased tax revenue rarely recovers the cost of the public spending.

Policy Example 2

The Federal Reserve observes inflation of 8% over a period of 6 months. They increase the discount rate in response.

Multiple Choice

Is this monetary policy or fiscal policy?

• Monetary Policy

• Fiscal Policy

Multiple Choice

This is a monetary policy, is it more likely to increase the money supply or decrease the money supply?

• Increase the money supply

• Decrease the money supply

Multiple Choice

Is this policy targeted at the demand side or the supply side of the economy?

• Demand Side

• Supply Side

• Both

Multiple Choice

Which economic goal is this policy MOST likely to target?

• Economic Growth

• Price Stability

• Full Employment

Explanation

This is a monetary policy intended to decrease the money supply in response to inflation. By increasing the discount rate, the Federal Reserve is increasing the price of borrowing. This will reduce demand for loans, hopefully reducing spending by both households and businesses. This expected decrease in aggregate demand will likely lead to less inflation. This is a long-run solution though, so often the effects aren't felt for many months, possibly even a year or more. As of May of 2023 the Federal Reserve has raised interest rates to their highest level in 40 years in an effort to combat inflation.

Policy Example 3

The Federal (United States) government decreases taxes for individuals and corporations earning over $500,000/year.

Multiple Choice

Is this monetary policy or fiscal policy?

• Monetary Policy

• Fiscal Policy

Multiple Choice

This policy is a fiscal policy, what area is it FIRST going to affect?

• Taxing

• Spending

Multiple Choice

Is this policy targeted at the demand side or the supply side of the economy?

• Demand Side

• Supply Side

• Both

Multiple Choice

Which economic goal is this policy MOST likely to target?

• Economic Growth

• Price Stability

• Full Employment

Explanation

This is a fiscal policy that became popular in the 1980s. The intention was to target the supply side of the economy. The logic behind it was that if corporations and the highest earners payed less taxes, they would then reinvest that money in new or expanded businesses and in higher wages for workers. This in turn would create economic growth. This was, and remains, a controversial policy. Most of the savings from less taxes went accrued as income and wealth increases to the top 1% of the US. Wages have not increased at the same rate as productivity, nor have they kept up with inflation since the 1980s.

Policy Example 4

The State of Michigan passes a law that says they will pay for trade school for anyone who is accepted. Trade schools are places where people can learn a trade. Examples of trades are: electician, plumbing, welding, HVAC, carpentry, auto mechanic, etc.

Multiple Choice

Is this monetary policy or fiscal policy?

• Monetary Policy

• Fiscal Policy

Multiple Choice

This policy is a fiscal policy, what area is it FIRST going to affect?

• Taxing

• Spending

Multiple Choice

Is this policy targeted at the demand side or the supply side of the economy?

• Demand Side

• Supply Side

• Both

Multiple Choice

Which economic goal is this policy MOST likely to target?

• Economic Growth

• Price Stability

• Full Employment

Explanation

This is a fiscal policy targeting the supply side of the economy. It is targeting the goal of full employment. Remember, in a labor market, the workers are the supply side. The workers are offering their time, skill, and labor for sale at a price (wages). The businesses are the demand side. They need to purchase labor to produce their goods and services. In this case the government is trying to increase the number of skilled laborers. The idea is that if people have more skills, they are more likely to be able to find a job.