 Fiscal Policy: The use of government expenditure (spending) and revenue collection (taxation) to influence the economy.  Who makes fiscal policy in the United States?  The President and Congress (State Reps and Senators).

Two Tools of Fiscal Policy: 1. Taxation 2. Government Spending If the economy is slow, the gov’t will want to increase the money supply, so it will increase government spending and decrease taxes…and vice versa.

Why use fiscal policy? To stabilize the natural business cycle.

 How does the Government get money?  Taxes!!!  What does the government spend money on?  Lots of things: Military, highways, education, welfare, policemen, firemen, social security, etc.

1. Neutral: Government spending is completely covered by taxes. 2. Expansionary: Government spending is greater than tax revenue. 3. Contractionary: Government spending is lower than tax revenue.

 Unemployment Rate: The percentage of people aged 16 and older who are actively looking for a job.  In 2000, the national unemployment rate was 4%.  Today, it is 9.1%.  In Arizona, the unemployment rate is almost 10%.

 Monetary policy is how the United States uses the Federal Reserve to stabilize the natural business cycle… 1. Controlling the rate of inflation 2. Combating unemployment

 Ok, let’s back up…A few things you need to know…  1. Inflation: A general increase in prices and fall in the purchasing power of money  2. Federal Reserve System: created USA divided into 12 districts…each has a federal reserve bank - all US banks belong to the system

 lend to member banks  Set interest rates on what banks charge one another for loans - consumer int. rates are “pegged” to that rate  Adjust money supply in the economy.

Who Controls Monetary Policy in the US? A: The Federal Reserve Bank The Chairman of “The Fed” is Ben Bernanke

Two tools the Federal Reserve uses to control the money supply, thereby controlling inflation and unemployment: 1. Manipulating interest rates 2. Buying or selling government bonds What is an interest rate??? What is a government bond???

 If “The Fed” wants to increase the money supply, it will decrease interest rates and buy government bonds.  If “The Fed” wants to decrease the money supply, it increase interest rates and sell government bonds.

 If prices are being pulled higher by increased demand (inflation!), one solution would be to lessen demand.  Any ideas how to discourage demand? How could the Fed make people less willing to spend??

 Make it harder to borrow money to buy things on credit by making the cost of money more expensive. In other words…  RAISE INTEREST RATES!  If people are not buying products, the Fed will decrease interest rates…making it cheaper to borrow $.

 Other than increasing interest rates, how might the Federal Reserve control inflation?  Answer: Selling gov’t bonds…this works by decreasing the amount of $ in the country b/c people will give their $ back to the gov’t in exchange for bonds.  Remember, bonds are simply I.O.Us …the gov’t is borrowing $ from you!

 So, The Federal Reserve can slow down inflation by…  1. Raising the interest rates.  2. Selling Government bonds. The Opposite is also true.

 How does the Fed control unemployment?  It reduces interest rates…why?  Because if its “cheaper” to borrow $, businesses will do just that and have more $ to expand their business and hire new workers.