5/7Warm Up What monetary policy tools can the Fed use to slow down rapid economic growth?

Answers The Fed can slow down economic growth by decreasing the money supply 1.Increase reserve requirements 2.Raise discount rate for borrowing reserves 3.Sell government securities in the open market

Objectives To identify the tools of fiscal & monetary policyTo identify the tools of fiscal & monetary policy To explain how economic stabilization tools affect the money supply, interest rates, & aggregate demandTo explain how economic stabilization tools affect the money supply, interest rates, & aggregate demand To analyze economic data to determine how fiscal & monetary policy should be used to correct economic problemsTo analyze economic data to determine how fiscal & monetary policy should be used to correct economic problems

Changing the Money Supply The Fed & Monetary Policy

Monetary Policy Tools Changing reserve requirementsChanging reserve requirements –Fed regulation that banks must keep % of deposits as cash in their own vaults or in Federal Reserve Bank

Monetary Policy Tools Changing discount rateChanging discount rate –Interest rate Fed charges on loans to banks How do consumers respond to high interest rates?How do consumers respond to high interest rates? –Spend less & save more

Monetary Policy Tools Open market operationsOpen market operations –Buying & selling of U.S. securities by the Fed –“open” b/c anyone can buy securities –When bank buys securities from the Treasury, purchase amount is deducted from the bank’s reserves Result is the bank will have less $ to lend outResult is the bank will have less $ to lend out

Economic Problem Solving Advising the Fed

Changing the Money Supply Congress, the President & Fiscal Policy

Fiscal Policy Federal government’s use of taxation & spending policies to stabilize the economyFederal government’s use of taxation & spending policies to stabilize the economy

The Great Depression When the stock market crashed, Herbert Hoover was the president. Economists at this time believed that if left alone, the economy would correct itself – laissez faire approach. In 1936 the economist John Maynard Keynes introduced a new theory.

Keynesian School of Econ According to Keynes, what should the gov’t do to taxes & gov’t spending during a time of recession? During a period of rapid inflation?

Recession Reduce taxes & increase gov’t spendingReduce taxes & increase gov’t spending What effect will this have on the money supply?What effect will this have on the money supply?

Rapid Inflation Increase taxes and reduce government spending

The Great Depression In what ways did FDR implement Keynesian approach to economic recovery?

2001 Recession Questions 1.What are two reasons Pres. Bush gives to justify his tax relief program? 2.Why did Pres. Bush discourage a tax increase? 3.Why would the FED lower open market security rates after 9/11?

Summary Which policy seems more effective in regulating the economy—fiscal or monetary?