Economic Policy

Fiscal Policy Fiscal policy = taxing and spending Fiscal policy affects the economy

by making changes in the government’s methods of raising money and spending it

Fiscal PolicyKeynesian Economics

Government is responsible for stabilizing the economy through taxing and spending

Originally developed during the Great Depression, meant for only special circumstances

Since Kennedy’s presidency, policymakers have used Keynesian economics to “fine tune” economy (discretionary fiscal policy)

Fiscal PolicyWhere the Money Comes From

Federal Income TaxesSocial Insurance TaxesBorrowingOther taxes

Where the Money GoesEntitlement programsNational defense National debt

Monetary PolicyMonetary policy is the

government’s control of the money supplyToo much money in system leads to inflation (devaluation of dollar)

Too little money in circulation leads to deflation

Monetary PolicyFederal Reserve System arm of government

that controls the money supplyConsists of 12 regional banks which supervise about 5000 banks across the U.S.

Headed by the Federal Reserve Board (The Fed)Seven members appointed by president, approved by Senate for 14-year terms; may not be removed from office before term is up

Ben Bernanke is current chair