Unit 6 Monetary and Fiscal policies How to influence the business cycle…

Monetary policy $$$$$$$$$$$$$$$$$$$$$$$$$$$ Controlled by the Federal Reserve System Discount rate –The rate the Federal Reserve Bank (a bank for the banks) charges a member bank for a loan. Open market operations –Buying and selling of government bonds

Monetary policy $$$$$$$$$$$$$$$$$$$$$$$ Loose monetary policy (to help the business cycle expand) –Decrease the discount rate, decreases interest rates –Buy bonds – gives $ to bond holders Tight monetary policy (to help the business cycle contract) –Increase the discount rate – increases interest rates, fewer customers/businesses will borrow $ –Sell bonds – takes money from bond holders

Monetary policy $$$$$$$$$$$$$$$$$$$$$$$$$$$ Loose monetary policy –Creates more money –Long term could cause inflation Tight monetary policy –Reduces the money available –Long term could cause unemployment if consumers stop spending and businesses begin to lay off employees

What would you suggest? 1. The business cycle is in an expansion? 2. The business cycle is in a contraction? 3. The GDP has decreased significantly. 4. The GDP has increased significantly. 5. The unemployment rate has decreased significantly. 6. The unemployment rate has increased significantly.

What would you suggest? 1. The business cycle is in an expansion? –Keep the current policy or –Begin a tight money policy (increase discount rate and sell bonds, begin to slowly take $ out of circulation/out of consumer hands) 2. The business cycle is in a contraction? –Loose $ policy (decrease the discount rate and buy bonds – get $ into consumer hands) 3. The GDP has decreased significantly. –Loose $ policy – decrease the discount rate and buy bonds.

What would you suggest? 4. The GDP has increased significantly. –Keep the current policy OR –Slowly begin a tight $ policy. 5. The unemployment rate has decreased significantly. –Keep the current policy 6. The unemployment rate has increased significantly. –Loose $ policy

Fiscal (freaking, federal, fiscal tax me and spend it on you policy) Government spending –Spending money on infrastructure (roads, bridges, dams, flood gates…) –Military, education, Medicare, Social Security –Unemployment, health care Government taxes –Progressive income taxes –Excise taxes (gas, alcohol, cigarettes, tanning)

Fiscal (freaking, federal, fiscal tax me and spend it on you policy) Loose fiscal policy –Increase government spending –Decrease taxes Tight fiscal policy –Decrease government spending –Increase taxes

Fiscal (freaking, federal, fiscal tax me and spend it on you policy) Loose fiscal policy effects –More $ for consumers and businesses –Business cycle will expand Tight fiscal policy effects –Less $ for consumers and businesses –Business cycle will contract

What would you do? 1. The US economy is in recession. 2. The US inflation rate is too high. 3. The unemployment rate is too high. 4. Make up your own scenario.

What would you do? 1. The US economy is in recession. –Loose fiscal policy – increase spending and decrease taxes 2. The US inflation rate is too high. –Tight fiscal policy – decrease spending and increase taxes 3. The unemployment rate is too high. –Loose fiscal policy 4. Make up your own scenario.