Fiscal & Monetary Policy. Economic Policy Objectives of the US Government:

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Presentation transcript:

Fiscal & Monetary Policy

Economic Policy Objectives of the US Government:

Objective #1: Promotion of Economic Growth: to stimulate growth across the economy

But how? There are three views on this: Liberal Conservative Moderate

Liberal: Invest in education & job training Conservative: Laissez-faire; reduce taxes; limit gov’t. regulation Moderate: Invest in public work projects to increase jobs

Objective #2: To achieve full employment

Full employment is achieved in the US at 4%; there are always people out of the work force.

Objective #3: To control inflation. The Consumer Price Index (CPI) helps the government measure this.

There are three ways in which the government achieves its economic objectives: Fiscal policy Monetary policy Direct Intervention

Direct Intervention can come in the form of regulations of health & safety, providing subsidies, setting wage and price controls, or giving government contracts.

Fiscal Policy: federal expenditures and revenues, such as taxes, duties, fines... the source from where the revenue comes, and how it is spent.

Congress is in charge of fiscal policy. The principal instrument of fiscal policy is the federal budget. The principal source of money for the gov.’t is the personal income tax.

Monetary Policy: Availability & flow of money in the economy: What money can be borrow; interest rates; repayment requirement.

Monetary policy is the responsibility of The Fed (The Federal Reserve System), created by Congress in 1913.

The Fed does not need the approval of Congress or the President in order to act. The board of governors and the Chairman of The Fed are appointed by the Prez., confirmed by the Senate.

The Fed has three tools: Open Market Operations Reserve Requirements Discount Rate

Open Market Operations: The buying and selling of US government securities.

Reserve Requirements: The Fed requires banks to keep a certain amount of their deposits in reserve.

Discount Rate: Interest rate that The Fed charges banks & other institutions when they borrowed from The Fed.