U.S. Economic Policy

Goals Promote Maximum Employment Promote Maximum Production Fight Inflation

Instruments to achieve goals Provide Goods Military/defense, police, firefighters, public parks, bridges Redistribution of Income Graduated tax – wealthy pay more Regulate Economic activities Prohibit monopolies, consumer protection (EPA, FDA)

Fiscal Policy Government Taxing and Spending Policies 2 types of Economic Policies Expansionary policies – using taxing and spending to stimulate the economy and create growth Recession/Depression Businesses closing Unemployment rising Contractionary policies – using taxing and spending to slow growth Inflation Production and sales are strong Consumers have too much money to spend

Contracting Economy v. Expanding Economy spend more $ decrease taxes Objective: Increase consumer demand Spend less $ Increase Taxes Objective: Reduce consumer demand Gov should spend more than it receives in taxes Gov hires more workers, buys more goods More people are employed; new workers buy more goods Consumer demand creates more production jobs Gov should spend less than it receives in taxes Consumers will spend less money Businesses will spend and borrow les Reduced consumer demand leads to lower prices During an Inflationary Period In a Depression

Monetary Policy Controlling the money supply 2 types of Economic Policies Expansionary policies – using the discount rate, reserve requirement and Open Market Operations to stimulate the economy and create growth Recession/Depression Businesses closing Unemployment rising Contractionary policies – using the discount rate, reserve requirement and Open Market Operations to slow growth Inflation Production and sales are strong Consumers have too much money to spend

Monetary Policy Tools Adjusting the Reserve Requirement Money that banks keep out of circulation-- a portion of their deposits Adjusting the Discount Rate Rate of interest that Federal Reserve charges banks on loans Open Market Operations Buying or selling of government bonds

Federal Reserve Federal Reserve - 12 regional banks that serve as “bankers bank” Independent Agency Established by Wilson President appoints chairman Controls the money supply

Contracting and Expanding the Economy Increasing Reserve Requirement Increase the Discount Rate Sell government Bonds Decrease Reserve Requirement Decrease the Discount Rate Buy Government Bonds Federal Reserve reduces the money supply Interest rates rise Businesses borrow less Economic growth is slowed to avoid inflation Federal Reserve puts more money into circulation Interest rates go down Businesses borrow more; stimulating production Consumers borrow more to spend more on cars, homes, etc. During an Inflationary Period In a Depression

Fiscal – federal government tax and spend policies Expand Economy Increase demand Contract Economy Decrease demand Taxes Decrease Increase Spending Monetary – federal reserve regulating the amount of money in circulation Interest Rate Reserve Requirement Gov’t Bonds Buy Sell