Transcript Fiscal and Monetary Policy

Fiscal and Monetary
Policy
Chapters 12, 13 and parts of 29
Time Period 2 or 3 weeks.
Fiscal Policy
Fiscal policy is done by CONGRESS—not
the FED
Stabilization is done by G and T collection
Can increase employment or reduce
inflation
Everything equal, what puts more money in the
economy, G or a decrease in T?
The Employment Act of 1946
Congress proclaimed gov’t role in
promoting max. employment, production
and purchasing power
Created the Council of Econ. Advisors to
advise the President
Created the Joint Economic Committee of
Congress to investigate econ. problems.
Discretionary Fiscal Policy
= changes to G or T are at the option of
Congress
Two types = expansionary and
contractionary
Expansionary Policy
Used to combat recession
Increase G
Decrease T
If budget is balanced, a budget deficit is
created
Goal is to shift AD to the right
PL
SRAS
PL2
PL1
AD2
AD
Y1
Y2
GDPr
Contractionary Policy
Used to lower inflation
A decrease in G
An increase in T
Goal is to shift AD to the left by taking
money out of the system
PL
SRAS
PL1
PL2
AD2
Y2
YI
AD
GDPr
Financing Deficit Spending
1. borrow from the public
Sell bonds to the public
Competes with private businesses
With this added demand for $, interest rates
may increase and private Ig may decrease
2. Money Creation
FED loans money directly to the gov’t
Does not decrease private Ig or consumption
Could increase inflation
What to do with a Surplus
1. Pay off public debt
Buy back bonds
Puts $ back into the system, increases consumption
• May offset contractionary policy that created
the surplus
2. stand idle
Withholds purchasing power
No chance of inflation
Built In Stability--Automatic
1. Income Tax
As income increases, people pay more taxes.
This limits the increase in DI and C.
2. Unemployment compensation
The income of unemployed does not fall to
zero. UC provides a base level of income.
3. Stocks and Bonds
Dividends do not follow the swings of the
business cycle. Bond payments are established
at the time the bond is purchased
Group work
There will be 3 large groups
You will decide how to split up the work as
a group
At least half of the group will present
Someone will type notes and email it to
me TONIGHT so I can make copies
Group 1—the smallest group
Page 229-230
Built-In Stability
Group 2
Pages 230-232
Evaluating Fiscal Policy
Stop at recent US fiscal policy
Group 3—largest group
Pages 233-237
Problems, criticisms and complications
OMIT
A Political Business Cycle
Offsetting State and Local Finance
Stop at Supply Side Fiscal Policy