Monetary and Fiscal Policy

Monetary vs. Fiscal Policy

What tools does the US government have to help the economy?

Multiple Choice

Where on the business cycle is economy A?

• Expansion

• Contraction

• Peak

• Trough

Multiple Choice

Where on the business cycle is economy B?

• Expansion

• Contraction

• Peak

• Trough

Multiple Choice

Where on the business cycle is economy C?

• Expansion

• Contraction

• Peak

• Trough

Multiple Choice

Where on the business cycle is economy D?

• Expansion

• Contraction

• Peak

• Trough

Multiple Choice

Which economy is MOST LIKELY to have inflation

• A

• B

• C

• D

Multiple Choice

Which economy is MOST LIKELY to have the highest unemployment?

• A

• B

• C

• D

Multiple Choice

Which economy is MOST LIKELY to have a growing GDP?

• A

• B

• C

• D

Multiple Select

Where on the business cycle would a government its economy to be?

• Expansion

• Contraction

• Peak

• Trough

Monetary ($$$$)

• Monetary policy is the way that the government controls the supply of money

The Federal Reserve (The Fed)

• The Central Bank of the US (Controls monetary policy)

• Create in 1913 by the Federal Reserve Act

Tools that the Fed uses to control Monetary Policy:

• Discount rate- fee the Feds charge banks to borrow money 

• Reserve rate- amount of cash that the Fed requires banks have on hand   

• Open market operations- buying and selling securities/bonds 

Multiple Choice

When the Fed raises the discount rate, banks raise their interest rate

• True

• False

Loose Monetary Policy (putting money out there)

• During a contraction/trough to make more $ available & stimulate the economy  

• Discount rate is lowered --> interest rates lowered --> people save less & borrow/spend more

• Reserve rate is lowered --> banks can lend more money --> people can spend more money 

• Buy back government bonds --> more cash in circulation 

Multiple Choice

What might a loose monetary policy create?

• Unemployment

• Low GDP

• Deflation

• Inflation

Tight Monetary Policy (pulling $ out of the economy)

• During an expansion/peak to make less $ available & slow down the economy 

• Discount rate raised --> interest rates are raised --> people save more & borrow/spend less

• Reserve rate is raised --> banks lend less money -->people spend less money --> helps control inflation

• Sell government bonds --> less cash in circulation 

Open Ended

What would advantages/disadvantages of monetary policy be?

Fiscal Policy

• Government adjusting its economic policy

• Controlled by Congress

• Taxing and spending

Expansionary Fiscal Policy

• Implemented during a recession/contraction to stimulate the economy

• Lower taxes on businesses and individuals 

• Increase government spending on social programs 

• Goal- get $ circulating 

• Drawback- increases deficits and debt 

Contractionary Fiscal Policy

• Implemented during an expansion to slow the economy

• Raise taxes on businesses and individuals 

• Decrease government spending on social programs 

• Goal- get people to save more money to avoid inflation  

• Drawback- can send the economy into a contraction  

Multiple Choice

If Congress was implementing expansionary fiscal policy, what type of monetary policy would the Fed implement?

• Tight

• Loose

• None

Open Ended

What are advantages/disadvantages of fiscal policy?

Multiple Choice

The economy was doing well but recently, many people have fallen on hard times. Due to the high inflation, people are beginning to buy fewer products and factories are beginning to lay off workers. GDP fell slightly from last quarter, while unemployment rose about the same amount. Citizens are writing to their elected representatives to being implementing tools to turn around the economy before things get worse.

What phase of the business cycle is this economy MOST LIKELY in?

• Expansion

• Contraction

• Peak

• Trough

Multiple Choice

What fiscal policy should Congress follow to help the economy?

• Tax more and spend less

• Tax less and spend more

• Tax less and spend less

• Tax more and spend more

Multiple Choice

What monetary policy should the Fed implement?

• Loose, so people will spend more money

• Loose, so people will spend less money

• TIght, so people will spend more money

• Tight, so people will spend less money