Transcript Economic Policy Lecture

Fiscal & Monetary
Policy
Economic Policy
Objectives of the US
Government:
Objective #1:
Promotion of Economic
Growth: to stimulate growth
across the economy
But how? There are three
views on this:
•Liberal
•Conservative
•Moderate
Liberal: Invest in education & job
training
Conservative: Laissez-faire;
reduce taxes; limit gov’t.
regulation
Moderate: Invest in public work
projects to increase jobs
Objective #2: To
achieve full
employment
Full employment is
achieved in the US at
4%; there are always
people out of the
work force.
Objective #3: To control
inflation.
The Consumer Price Index (CPI)
helps the government measure
this.
There are three ways in which
the government achieves its
economic objectives:
•Direct Intervention
•Fiscal policy
•Monetary policy
Direct Intervention can come in
the form of regulations of
health & safety, providing
subsidies, setting wage and
price controls, or giving
government contracts.
Fiscal Policy: federal expenditures
and revenues, such as taxes, duties,
fines . . .
the source from where the
revenue comes, and how it is
spent.
Congress is in charge of fiscal
policy.
The principal instrument of
fiscal policy is the federal
budget.
The principal source of money
for the gov.’t is the personal
income tax.
Monetary Policy:
Availability & flow of money
in the economy:
What money can be borrow;
interest rates; repayment
requirement.
Monetary policy is the
responsibility of The Fed
(The Federal Reserve
System), created by
Congress in 1913.
The Fed does not need the
approval of Congress or the
President in order to act. The
board of governors and the
Chairman of The Fed are
appointed by the Prez.,
confirmed by the Senate.
The Fed has three tools:
•Open Market Operations
•Reserve Requirements
•Discount Rate
Open Market
Operations:
The buying and selling
of US government
securities.
Reserve Requirements:
The Fed requires banks to
keep a certain amount of
their deposits in reserve.
Discount Rate:
Interest rate that The Fed
charges banks & other
institutions when they
borrowed from The Fed.