Fiscal and Monetary Policy
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Transcript Fiscal and Monetary Policy
Fiscal Policy
Krugman Section 4
Modules 20 and 21
Fiscal Policy
Fiscal policy is done by CONGRESS—not
the Federal Reserve
Stabilization is done by G and Tax (T)
collection
Everything equal, what puts more money in the
economy, G or a decrease in T?
G! People can SAVE some of a tax break
The Employment Act of 1946
Congress proclaimed gov’t role in
promoting max. employment, production
and purchasing power
Keynesian Economics
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
LRAS
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
LRAS
SRAS
PL1
PL2
AD2
Y2
YI
AD
GDPr
Financing Deficit Spending
1. borrow from the public
Sell bonds to the public
Take out loans from the public
2. Money Creation
FED loans money directly to the gov’t
increases 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
Automatic Policy--Built In Stability
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