Monetary and Fiscal Policy Scenarios

Scenarios  With your group go over the Year 1 & 2 Scenarios  Use pages 2,4,5,16,17 in your workbook for help with scenarios  Note if your workbook says group 1,2,3….  You must finish Year 1 before you get Year 2

Year 1  Colleges are reporting that 92% of new graduates are able to find work upon graduation.  Retailers report better than expected sales during the last quarter  Ford has announced a six month delay in filling customer orders for the new Mustang due to heavy sales nationwide.  Six Flags, Inc. has reported average earnings that are 18% higher than last year’s.

Year 2  GE and ATT have both filed for bankruptcy  The number of workers filing for unemployment claims has risen by 18% from the last quarter  New housing starts are at a 10 year low  Consumer confidence has not improved and retailers are expecting Christmas to be the lowest on record.

PEAK EXPANSIONCONTRACTION TROUGH Raise Taxes Cut Spending Raise Discount Rate Sell Bonds Raise Reserve RequirementLower Reserve Requirement Lower Discount Rate Buy Bonds Lower Taxes Increase Spending You want to: Put money INTO the Government/Fed You want to: Take money OUT OF the Government/Fed Page 2 Business Cycle

Page 4

Page 5 > Fiscal Policy  Page 5 Fiscal Policy  The use of the Government budget (SPENDING) and revenue (TAXATION) to influence the US economy  The policy is set by Congress  The policy will be used for the fiscal year

Page 5 > 2 Schools of Thought John Maynard Keynes  Promoted the use of government spending  Used to affect level of economic activity Adam Smith  “Invisible Hand”  Laissez Faire  If left alone, business cycles will correct themselves over time

 Government spends money to provide goods and services  Government pays for those expenditures through taxation and borrowing  Where does the $$ come from?  Individuals  Corporations  Financial Institutions  Foreign entities or foreign governments Page 5> Government’s role in Circular Flow….

 Type 1: Contractionary Policy -used to slow the economy DOWN and fight inflation during an Expansion  The Government Does 2 things to fix this: 1. Raise taxes- take money OUT of the economy 2. Reduce Government Spending- cutback on funding social programs and business contracts We then operate at a Budget Surplus  raise taxes and cut spending (spend less than you take in with Taxes)  Revenue > Expenditures Page 5> Two Types of Fiscal (gov’t) Policy

 Type 2: Expansionary Policy : used to “jump start” the economy out of a recession. Also fights unemployment & deflation.  The Government does 2 things to fix this: 1. Cut Taxes -gives consumers more $ to spend, save, or invest 2. Increase Spending -government spends more $ (On what ?)  We then operate with a Budget Deficit  government spends more $ than it collects in taxes  Revenue < Expenditures Page 5: Two Types of Fiscal Policy

1. Reserve Requirement- the amount or % of deposits banks are required to keep and not loan out (least used tool) 2. Discount Rate- % rate the FED charges banks on loans, will influence the % rate on all other loans 3. Open Market Operations (government bonds, bills, etc.)- the buying and selling of government securities ( most used tool) Page 16/17: Monetary Policy 3 Tools of Monetary Policy

 1.Easy Money Policy - increases the money supply  economy is experiencing contraction & government wants to stimulate the economy  So We…  buy government securities  lower the discount rate  Creates lower interest rates  lower reserve requirement D. 2 Types of Monetary Policy Keep the $$ FLOWING!

 2.Tight Money policy - reduces the money supply  economy is experiencing a rapid expansion that may cause high inflation and government wants to take money out of circulation  So we…  increase reserve requirement  increase discount rate  Creates higher interest rates  sell government securities D. 2 Types of Monetary Policy Keep the $$ AWAY!