Transcript Fiscal & Monetary Policy

Fiscal & Monetary Policy
Warm Up

Look at pages 649, and 691 to answer
these questions…
1. What is a progressive tax system?
2. How does it help stabilize the economy?
3. How does the federal gov’t use taxes to
keep the economy stable? When does it
lower and raise them?
Tax Systems
Progressive – Rich pay higher % of
money than poor (our income tax)
 Regressive – Poor pay higher % of their
income than rich (sales tax)
 Proportional – Everyone pays equal %
 Excise Tax – Tax on a particular type of
item (cigarettes, alcohol, gas)

What type of tax is this?
1. 5% tax on beer and wine.
2. State income tax
3. Sales tax on groceries
4. Everyone pays 10% of their income to
the government.
5. Everyone pays an annual $50 tax
Answer in your notes
1.
2.
What type of tax system do you think is
the most fair and why?
Why do you think we have excise
taxes on certain goods?
What is the purpose of Fiscal and
Monetary Polices?

To ensure economic expansions and
contractions are not too severe
NOT
What’s the difference?
Fiscal Policy = actions Congress can
take (spending, taxes, gov’t programs)
 Monetary Policy = controlled by the
Federal Reserve (amount of $$, interest
rates)


Federal Reserve (“The Fed”) = central
bank for U.S.
Economic Problem: Inflation
Prices are too high, people have too much
money (and it’s not worth that much)
So… the Goal is to DECREASE the amount of
$ in the hands of consumers.
We want contractionary or tight fiscal policy.
(Make it smaller.)
Fiscal Policy:
Taxes (take $$ out of peoples wallets)
Gov’t Spending (less gov’t programs)
Welfare (transfer) payments (put less $$
into peoples’ wallets)
Economic Problem:
Unemployment (Recession)
People don’t have ENOUGH money…and
aren’t spending.
So… the Goal is to INCREASE the amount of $
in the hands of consumers
We want expansionary or loose fiscal policy.
(Make it grow.)
Fiscal Policy
(Congress)
Taxes (more $ left to spend)
Gov’t Spending (more gov’t programs)
Welfare (transfer) payments (more $ in
your pocket)
Fiscal Policy - Practice
1. Work on your own to complete as
much of the “fiscal policy” side as you
can. You have 10 minutes. If you aren’t
sure of something, leave it blank.
2. Talk to a partner to help you fill in the
blanks. You have 5 minutes.
Civics and Economics
Day 54
MONETARY POLICY
Monetary Policy
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As a review:
– The Gov’ts job is to regulate the economy
(minimize the ups and downs).
– Congress controls fiscal policy.
• Including Taxes, government spending and
Welfare payments.
– The Federal Reserve controls monetary
policy.
• Supply of money, interest rates
Economic Problem: Inflation
Same problem as before… how does the
Federal Reserve handle it?
Monetary Policy (Federal Reserve)
Interest (Discount) Rates
Pay more interest on loans --> people borrow
less --> have less to spend
Reserve Ratio
Banks have to keep more money in ‘reserve,’
less to lend out, less for people to spend
Sell Bonds
People buy bonds (investment) so less $ in
their wallet to spend
Economic Problem:
Unemployment (Recession)
Same problem… how does the Federal
Reserve respond?
Expansionary or loose monetary policy.
(Make it grow.)
Monetary Policy (Federal Reserve)
Interest (Discount) Rates
Low interest rates -> easier to borrow money -> people borrow $
to spend it -> more spending!
Reserve Ratio
Banks don’t have to keep as much money in reserve, more to
lend out
Buy Bonds
Give people back their money with interest…more $ in their
pockets to spend!