Fiscal and Monetary Policy Unit 6

Fiscal Policy Fiscal Policy: changes in federal __________ and ___________ designed to affect the level of aggregate demand in the economy Aggregate demand is the _________ amount of spending on ______ goods and services in an economy The _______________ and ______________ affect fiscal policy

Fiscal Policy Fiscal Policy: changes in federal taxes and spending designed to affect the level of aggregate demand in the economy Aggregate demand is the total amount of spending on all goods and services in an economy The President and Congress affect fiscal policy

Expansionary Fiscal Policy When the government is concerned about a ____________, it should follow an expansionary policy Government can increase AD by: Spending _____ Cutting _____ These policies will increase the budget _____, but should increase AD Effect on Economy: Price Level ____________ Real GDP _____________ Unemployment _____________

Expansionary Fiscal Policy When the government is concerned about a recession, it should follow an expansionary policy Government can increase AD by: Spending more Cutting taxes These policies will increase the budget deficit, but should increase AD Effect on Economy: Price Level increases Real GDP increases Unemployment falls

Contractionary Fiscal Policy When the government is concerned about a ____________, it should follow an contractionary policy Government can decrease AD by: Spending _____ Raising _____ These policies will decrease the budget _____ Effect on Economy: Price Level ____________ Real GDP _____________ Unemployment _____________

Contractionary Fiscal Policy When the government is concerned about a inflation, it should follow an contractionary policy Government can decrease AD by: Spending less Raising taxes These policies will decrease the budget deficit Effect on Economy: Price Level decreases Real GDP decreases Unemployment increases

Monetary Policy Federal Reserve Banks

The Federal Reserve Bank Created in 1913 to bring order and centralization to the U.S. banking system following the Panic of 1907 There are ______ branches of the Federal Reserve Bank

The Federal Reserve Bank Created in 1913 to bring order and centralization to the U.S. banking system following the Panic of 1907 There are 12 branches of the Federal Reserve Bank

Federal Reserve Banks Map

Structure of the Fed

Chairmen Alan Greenspan 1987-2005 Ben Bernanke – Jan. 2006-2014 Janet Yellen 2014-2018 Alan Greenspan, served on the Federal Reserve since Ford, Chairman from 1987-2005. Janey Yellen’s Appointment comes up next year, will Trump renominate her?

Functions of the Federal Reserve ______ of the United States Government Securities Auction – selling & buying government bonds Issuing ________

Functions of the Federal Reserve Bank of the United States Government Securities Auction – selling & buying government bonds Issuing currency

Serving Banks Check Clearing & _________ ________ __________ Supervising Lending Practices – inspecting ___________ assets (loans) + available cash = deposits Lender of Last resort – banks may borrow money from Fed when short of funds

Serving Banks Check Clearing & Electronic Funds Transfer Supervising Lending Practices – inspecting Banks assets (loans) + available cash = deposits Lender of Last resort – banks may borrow money from Fed when short of funds

Tools of Monetary Policy Reserve Requirement – the Fed sets this for banks, the percentage of deposits that banks _____ loan out. Open Market Operations – buying and selling government securities or ______. Discount Rate – This is the ______________ the Fed charges to lend money to banks.

Tools of Monetary Policy Reserve Requirement – the Fed sets this for banks, the percentage of deposits that banks cannot loan out. Open Market Operations – buying and selling government securities or bonds Discount Rate – This is the interest rate the Fed charges to lend money to banks.

Expansionary Monetary Policy When concerned about a recession, the Fed will ______________ the money supply Actions: ____________ Reserve Requirement – banks can loan out more $$ _________ Government Securities(open market) – The Fed purchases gov. bonds from banks ___________ Discount Rate – encourage borrowing, more $$ in money supply Effect on the Economy: Price levels will ________________ Real GDP will __________________ Unemployment _______________

Expansionary Monetary Policy When concerned about a recession, the Fed will increase the money supply Actions: Lower Reserve Requirement – banks can loan out more $$ Buys Government Securities (open market) – The Fed purchases gov. bonds from banks Lower Discount Rate – encourage borrowing, more $$ in money supply Effect on the Economy: Price levels will Rise Real GDP will Increase Unemployment Decrease

Contractionary Monetary Policy When concerned about inflation, the Fed will ______________ the money supply Actions: ____________ Reserve Requirement – banks will loan out less $$ _________ Government Securities(open market) – The Fed sell gov. bonds to banks ___________ Discount Rate – discourage borrowing Effect on the Economy: Price levels will ________________ Real GDP will __________________ Unemployment _______________

Contractionary Monetary Policy When concerned about inflation, the Fed will decrease the money supply Actions: Raise Reserve Requirement – banks will loan out less $$ Sell Government Securities(open market) – The Fed sell gov. bonds to banks Raise Discount Rate – discourage borrowing Effect on the Economy: Price levels will decrease Real GDP will decrease Unemployment increase Why is contractionary economic policy rarely used? Look at the effects, who wants to cause that? Also, inflation has not been a problem in the U.S. economy for close to 40 years

Monetary Policy Fiscal Policy ACTIONS: Money Creation, Interest Rates Taxing & Spending CONTROLLED BY: Federal Reserve President & Congress GOALS: Improve GDP, fight inflation Improve GDP, decrease unemployment