Transcript Expansionary Monetary Policy What is contractionary

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Please get a whiteboard, marker, and eraser
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Tickets are $100 each
Max of 10 tickets
Cannot win than once
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Bellwork- Review Questions
Monetary Policy Notes
Study Guide work time
(Quiz tomorrow!)
OUTCOME
 Students will determine how the Federal Reserve
uses monetary policy to correct economic
instability
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Edgenuity Remediation due next Monday
5. Bob earns $34,000 a year working as a graphic
designer and pays15% of his income in taxes. A few
years later, the economy experiences inflation and
Bob’s wages increase to $38,000. Unfortunately for
Bob, he is not much better off from this raise
because it pushed him into a higher tax bracket of
25%. This is an example of how progressive income
taxes act as ________
◦ Automatic Stabilizers
6. During a recession, a higher percentage of the
American population falls on harder times, and more
government money is needed to fund programs such
as food stamps. Then, when this government aid
enters the economy, aggregate demand increases
and improves economic conditions. This is an
example of
◦ Automatic Stabilizer
7. During a recession, Congress decided to cut
income taxes for the middle class by 2%. This is an
example of
◦ Discretionary Fiscal Policy
8. In a period of high economic growth, would
automatic stabilizers increase or decrease?
◦ Decrease
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Monetary policy
◦ actions taken by the Federal Reserve to change the amount
of money in circulation
◦ Change the amount of money in circulation to curb inflation
or reduce recession
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What institution is in charge of Monetary Policy?
 The Federal Reserve
 Our nation’s central bank
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What are the goals of monetary policy?
◦ The goals of monetary policy are to promote maximum
employment and stable prices and interest rates.
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Matching:
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What is expansionary monetary policy?
◦ Used during a recession
◦ Called the “easy money policy” because it puts more money into
circulation by making it easier for borrowers to secure a loan.
◦ Easier loans means consumers borrow more for cars, homes, etc
◦ Easier loans means businesses can produce more, which creates
jobs and decreases unemployment.
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What is contractionary monetary policy?
◦ Used during a period of inflation
◦ Called the “tight money policy” because it takes money out of
circulation by making it harder for borrowers to secure a loan.
◦ Tight money means consumers borrow less for cars, homes, etc
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Open Market Operations
◦ buying and selling of government bonds or
securities (investments)
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Adjusting the Reserve Requirement
◦ Required percentage of deposited money banks
have to have in reserve that can’t be lent out
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Adjusting the discount rate
◦ The interest rate the Fed charges when lending
money to commercial banks
Fiscal or Monetary Policy?
 The government raises taxes
 The Federal Reserve sells bonds
 The Federal Reserve lowers the discount rate
 The government cuts spending on road
construction
 The Federal Reserve increases the reserve
requirement
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Open Market Operations
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Contractionary Monetary Policy- Selling Bonds
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Expansionary Monetary Policy- Buying Bonds
◦ buying and selling of government bonds or securities
(investments)
◦ The Fed sells bonds to commercial banks or the public.
◦ Purchasers of these bonds then transfer their money to the Fed to
pay for the bonds. This allows money to be taken out of
circulation
◦ When consumers have less money, aggregate demand will
decrease, which prevents inflation.
◦ OMO interactive
◦ The Fed buys bonds from commercial banks or the public
 banks will cash in the bonds they had invested in the Fed
◦ When banks and people have more money aggregate demand will
increase, which will help the economy recover from a recession.
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Do you want to buy or sell bonds during a
period of inflation?
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Reserve Requirement
◦ Required percentage of deposited money banks have to have
in reserve that can’t be lent out
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Contractionary Monetary Policy- Raising the RR
◦ During inflation, the Fed increases the reserve requirement in
order to encourage banks to lend less money, thereby
withdrawing money from the economy
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Expansionary Monetary Policy- Lowering the RR
◦ In times of recession, the Fed may decrease the reserve
requirement in order to encourage banks to lend more money.
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Will the Fed raise or lower the reserve ratio
during inflation?
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The Discount Rate
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Contractionary Monetary Policy- Raising the DR
◦ The interest rate the Fed charges when lending money to
commercial banks
◦ If interest rates for credit cards increased from 15% to 30%, would you
buy more or less with your credit card?
 Less, it is more expensive to borrow money
◦ When the Fed increases the discount rate, banks borrow less money
because it is more expensive.
 Banks then loan less money to businesses and consumers, which
decreases aggregate demand and helps reduce inflation.
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Expansionary Monetary Policy- Lowering the DR
◦ When the Fed decreases the discount rate, banks borrow more
money because it is cheaper
 Banks then loan more $ out to their customers, increasing AD
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Will the Fed raise or lower the discount rate
during a recession?
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Expansionary policy
4. When is expansionary policy needed? During inflation or a
recession?
 Recession
5. In expansionary MP, does the Fed buy or sell bonds?
 Buys bonds- Banks have extra money, lend more, increase in AD
6. In expansionary MP, does the Fed raise or lower the
reserve requirement?
 Lower- Banks required to reserve less deposited money. Lend more,
increase AD
7. In expansionary MP, does the Fed raise or lower the
discount rate?
 Lower- Banks borrow more from the Fed because it’s cheaper. They
then loan this money out, increasing AD.
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Contractionary policy
8.
When is contractionary policy needed? During inflation or
a recession?
 Inflation
9.
In contractionary MP, does the Fed buy or sell bonds?
 Sell bonds- Banks transfer money to Fed. Banks have less $,
so they lend less. Decrease AD.
10. In contractionary MP, does the Fed raise or lower the
reserve requirement?
 Raise-Banks required to reserve more deposited money.
Lend less, decrease AD
11. In contractionary MP, does the Fed raise or lower the
discount rate?
 Raise- Banks borrow less from the Fed because it’s more
expensive. Banks then loan less money out, decreasing AD.
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Allan Greenspan
◦ Previous Chairman of the
Fed (1987-2006)
◦ During his time as chairman
of the Fed he was likened to
a “rock star”
◦ Once he had left office and
the recession started he was
blamed as one of the top
people responsible for the
recession
 Easy-money policies and
deregulation
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Janet Yellen
◦ Current Chairman of the Fed
◦ First female Chair of the Fed
 Took office Feb, 2014
 Served as vice chair under previous
chairman, Ben Bernanke
1. Is raising interest rates
expansionary or
contractionary MP?
 Contractionary MP
2. Considering the Great
Recession, what does this
action by the Fed show
about how our economy is
doing?
 We have improved
significantly and need
less support
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Jack Lew
◦ U.S. Secretary of the
Treasury
◦ Principle economic advisor
of President
◦ Oversees the manufacturing
of currency
◦ Part of President Cabinet
◦ 5th in line for Presidential
Succession
Jack Lew’s Signature
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Since taking office, Jack Lew has been working toward
ending corporate tax inversion
 Corporate tax inversion-companies attempting to lower
their tax bills by relocating overseas
◦ Examples:
 In attempt to avoid the U.S.’s 40% corporate tax rate, Fruit
of the Loom moved its corporation headquarters to the
Cayman Islands which does not have a corporate tax rate
 Walgreens announced its plan to move to Ireland (12.5%
tax rate) last spring but renounced its plan after public
shaming
3. Why might someone favor ending corporate tax
inversion? (This is a review question!)