Transcript Monetary Policy vs. Fiscal Policy

Monetary Policy vs. Fiscal Policy
Make it simple:
What can government do to help me spend
money and grow the economy or how can
government restrict my money and prevent me
from spending to fight inflation.
Fiscal Deals with Congress
What Tools Do They Have?
• Congress uses Fiscal Policy: A deliberate use of
taxes and spending to affect aggregate demand.
• Expansionary Policy- Encourage Spending by
putting money in your pocket! Can do this by
lowering taxes and investing in government
projects. This will drive up prices.
• Contractionary Policy/Restrictive- Discourage
Spending by taking money out of your pocket.
They will raise taxes and decrease spending to
control spending and inflation.
How the Government Increases
Spending
• Entitlement Programs: WIC (Women, Infants,
and Children), SNAP (food stamps), Social
Security, Welfare
• Increase in Defense Spending
• Spend money on projects (Space Program)
• Stimulus Program (Roads and other Civil
Engineering projects)
Monetary Policy is the FED
• Change the reserve requirement of funds banks
must keep on hand
• Federal Funds Market of how much banks charge
each other to borrow money to make their
reserve requirement
• Discount Rate- What the Fed charges banks to
borrow money to make reserve requirements
(The cost of All three are passed on to you in the
interest rates you must pay on credit cards and
loans)
Monetary Policy of the Fed Another
Important Tool
• Buying and selling of Government Securities
• Take money out of the economy: sell
securities/This also lowers Fed Funds rate for
banks
• Put money back in: Buy securities/Raises Fed
Funds for banks
This is known as OPEN MARKET OPERATIONS
Simply
• Tight Money is when the Fed Raises the
Reserve Requirement, Fed Fund Rate, and
Discount Rate and Open market operations of
selling securities
• Easy Money- Lowering the Reserve
Requirement, Fed Fund Rate, Discount Rate,
and Open Market Operations of buying
securities. (Lower Rates encourage loans to
consumers and spending)