Fiscal and Monetary Policy

Fiscal and Monetary PolicyEconomic GoalsFull EmploymentEnough jobs to employ all able and willing to workUnemployment/Employment DataBureau of Labor Statistics Part of Department of LaborPrice StabilityEliminate the UPS (Inflation) and DOWNS (Deflation) of pricesConsumer Price Index (CPI)Tracks movement of prices in Consumer GoodsBureau of Labor StatisticsEconomic GrowthGross Domestic Product (GDP) continually risesTotal value of goods and services produced by a nation in a yearShrinking signals a RECESSIONFiscal PolicyGovernments power to tax and spend to influence the economyFederal Spending = 20% of GDPGovernment spending can effect EMPLOYMENT, PRICES, AND GROWTHMore Spending = Economic GrowthLess Spending = Economy ShrinksMore Taxes = Economy ShrinksLess Taxes = Economic GrowthNote: Government can use taxes to control Inflation and DeflationProblems:TimingHow much tax cuts/increases

Monetary PolicyThe amount of currency in circulation and availability of creditMost often used tool in controlling nations economyFederal Reserve Board (1913) (The Fed)7 members nominated by President then ???Serve staggered 14 year termsIntended to stop panicsCustomers rush to take money out of banks due to no economic confidenceDoes so using 3 different tools:Reserve RequirementDiscount RateOpen Market Operations

Reserve RequirementAmount of money the Board REQUIRES to be kept in RESERVE in their vaults or on deposit with one of the 12 Fed Reserve BanksCannot be used to make loansMust be kept out of circulationBy Raising???Less money in circulation (more kept in the banks)By Lowering???More money available for loans (more in circulation)

Discount RateRate of interest banks must pay when they borrow money from the Federal ReserveIf Fed RAISES the discount rateBanks must pay moreCustomers must pay more =Less people take out loansIf Fed LOWERS the discount rateBanks pay less to borrow from FedCustomers encouraged to take out loans =People buy more big ticket items (houses, cars, etc.)Open Market OperationsMechanism used by the Fed to buy or sell government securities (T-bills, T-notes, T-bonds)When the Fed BUYS BACK FROM BANKSMoney going from Fed to banks =More money in circulationWhen the Fed SELLS TO BANKSMoney going from Consumer Banks to Fed =Less money in circulation