Vocabulary Monetary Policy- Conducted by the Fed,

involved either the increasing or decreasing the amount of money in circulation.

Fiscal Policy- Involves the gov’t decisions on how to spend money and tax households

Direct Taxes- Taxes paid directly to the gov’t (income taxes).

Indirect Taxes- Taxes paid through another agent (sales tax).

Reserve Requirement- The amount of money banks must keep in the Fed.

Discount Rate- The interest rate at which the Fed charges member banks for loans.

Open Market Operations- The sale or purchase of US Treasury Bonds.

Warm Up How does the government get most of

its revenue?

EFFECTS OF MONETARY POLICY,

FISCAL POLICY, & THE FED

Fiscal Policy Fiscal policy involves

how the government chooses to spend money and tax households/businesses.

1st Part Taxation

Decreased taxes allows producers to spend more money on labor/capital and households have more disposable income.○ This increases

employment, production, and consumer demand

○ This also can lead to inflation

To deal with rising prices, governments will raise taxes

Taxes can either be direct (paid directly to the gov’t…income taxes) or indirect (collected through another agent…gas station)

Personal Income Tax○ Tax paid on a citizens

income Corporate Taxes

○ Taxes placed on businesses

Excise Taxes○ Taxes placed on items like

alcohol and cigarettes

Estate taxes○ Taxes placed on inherited

property Tariffs

○ Taxes placed on imports Regressive Taxes

○ % of tax one pays decreases as their income rises

○ Sales Tax Progressive Taxes

○ % of tax increases as their income rises

○ Income tax Proportional Taxes

○ Everyone pays the same %

2nd Part Government

Spending Money the

government takes in is called revenue

Deficit Spending○ Results when the

government spend more money than it takes in in taxes

Monetary Policy The FED

Conducts monetary policy and controls the amount of money in circulation

It does this in 3 ways…

1. Reserve Requirement% of money banks must keep in the FED (savings

account) What would happen if the FED raises the reserve

requirement?Banks would have less to lend thereby putting less money in

the economy and decreasing inflationThis is called “tight money policy”

What would happen if the FED lowers the reserve requirement?Banks would have more money to lend thereby increasing

inflationThis is called “easy money policy”

2. Discount Rate The interest rate that banks pay the FED to

borrow money The higher the Discount Rate charged

by the FED, the higher the interest rate charged by banks

What do higher interest rates encourage people to do?

○ Save, therefore decreasing the money supply

3. Open Market Operations The sale or purchase of U.S. Treasury Bonds

FED sells bonds, it lowers the money supply How? Money that is spent on bonds is money that is not

spent in the market. FED buys back bonds, it increases the money

supply How? People get back their investment with interest and

spending increases

REFLECTION HOW DOED THE GOVERNMENT USE TAXES

TO REGULATE THE ECONOMY? SUMMARIZE THE DIFFERENCE B/W

REGRESSIVE AND PROGRESSIVE TAXES HOW DOES GOVERNMENT SPENDING

AFFECT THE ECONOMY? IN WHAT 3 WAYS DOES THE FED CONDUCT

MONETARY POLICY AND CONTROL THE AMOUNT OF MONEY IN CIRCULATION?

Closing? What may the FED do to combat

inflation? Demand banks keep more money in

FED (reserve requirement) Raise the interest rate on the money

banks borrow from the FED (discount rate)

Sell US Treasury Bonds (open market operations)