fiscal and monetary policies the government’s role in the economy
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Fiscal and Monetary Policies
The Government’s Role
In the Economy
DRILL: What is the message the cartoonist is implying?
3 Goals of Economic Policy
We have a mixed-market economic system Government’s role in the economy is to:
1. Promote steady growth (grow our economy)
2. Keep people employed (full employment)
3. Keep inflation low (price stability)
The Business Cycle:
The Business Cycle: Vocab!
Peak: _________________________________ Trough: _______________________________ Expansion (Recovery):____________________
_______________________________________ Contraction: ____________________________
_______________________________________ Recession: ____________________________
ADD THESE:Economic Indicators
GDP – Gross Domestic Product• Measures how well the economy is doing• Total output (industry & services) of a country in
one year CPI – Consumer Price Index
• Measures inflation Unemployment Rate – unemployed ppl
• Measures the # of ppl who are out of work that want a full-time job
Fiscal Policy & Monetary Policy
Congress and the President use taxes and government spending to achieve economic growth, full employment, and stable prices
Federal Reserve uses reserve requirements, discount rate, and open market operations to achieve economic growth, price stability, and full employment
Fiscal Policy
Congress and the President use taxes and government spending to achieve economic growth, full employment, and stable prices
Expansionary & Contractionary Fiscal Policy
Decrease taxes – people give less $ to the gov’t, so:• People spend more $ and in stores• Items in stores are in more demand• Companies produce more• GDP will increase
Increase taxes – people give more $ to the gov’t, so:• People spend less $ in stores• Items in stores are in less demand• Companies produce less• GDP will decrease
Expansionary & Contractionary Fiscal Policy
Increase gov’t spending – will create more jobs, so:• People spend more $ and in stores• Items in stores are in more demand• Companies produce more• GDP will increase
Decrease gov’t spending – will create less jobs, so:• People spend less $ in stores• Items in stores are in less demand• Companies produce less• GDP will decrease
Advantages of Fiscal Policy
Helps the gov’t achieve its economic goals:• Growth (GDP)• Stability (Prices)• Full employment
Monetary Policy
Monetary Policy
Federal Reserve uses reserve requirements, discount rate, and open market operations to achieve economic growth, price stability, and full employment• Reserve requirements• Discount rate• Open market operations
The Federal Reserve It is the central bank of the United States It’s job is to balance between rapid growth
and recession• If money and credit grows too rapidly, inflation
can result• If money and credit grows too slowly, it can
cause a recession Uses three main tools:
• 1. Reserve Requirement• 2. Open Market Operations• 3. The Discount Rate (Interest Rates)
Reserve Requirement – the amount of $ banks must keep in their vaults
“Fed” decreases the reserve requirement, so:• Amount of $ the banks
can lend people goes up• Amount of $ in
circulation goes up• People spend more $
and in stores• Items in stores are in
more demand• Companies produce
more• GDP will increase
“Fed” increases the reserve requirement, so:• Amount of $ the banks can
lend people goes down• Amount of $ in circulation
goes down• People spend less $ in stores• Items in stores are in less
demand• Companies produce less• GDP will decrease
Discount Rate – the interest rate the “Fed” charges other banks
“Fed” decreases the discount rate – ordinary banks borrow more $ from the “Fed”, so:• Amount of $ the banks can
lend people goes up• Amount of $ in circulation
goes up• People spend more $ and
in stores• Items in stores are in more
demand• Companies produce more• GDP will increase
“Fed” increases the discount rate – ordinary banks borrow less $ from the “Fed”, so:• Amount of $ the ordinary bank can lend people goes down• Amount of $ in circulation goes down• People spend less $ in stores• Items in stores are in less demand• Companies produce less• GDP will decrease
Open Market Operations – people/businesses buy treasury bonds from the “Fed”
“Fed” sells treasury bonds, causing people/businesses to buy them, so:• Amount of $ in circulation goes down• People spend less $ in stores• Items in stores are in less demand• Companies produce less• GDP will decrease
“Fed” buys treasury bonds, causing people/businesses to sell them, so:• Amount of $ in circulation goes up• People spend more $ and in stores• Items in stores are in more demand• Companies produce more• GDP will increase
Advantages of Monetary Policy
Helps the gov’t achieve its economic goals:• Growth (GDP)• Stability (Prices)• Full employment
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