1. Fiscal and Monetary Policy
Chapter 14
Essential Question:
How do policymakers use fiscal and monetary policy to stabilize the economy?

2. Intro Fiscal policy and monetary policy are easy to confuse.
Fiscal policy refers to gov’t taxing and spending.
How much the gov’t takes in, then spends out.
Monetary policy refers to changing money supply & interest rates.
How much money is out there, and the rate of interest earned/paid.
Both are “buttons” the gov’t can push to fiddle with the economy.

3. Three views on this 1. Classical economists
Adam Smith – gov’t should stay out of the economy
View was challenged by Great Depression and FDR
2. Keynesian economists
John Maynard Keynes said the gov’t should get involved in economy during bad times.
Deficit spending was viewed as okay; it may jumpstart the economy.
This focuses on fiscal policy—taxing and spending.

4. Cont. 3. Monetarism and Friedman
Milton Friedman said the supply of money out there is key.
Said Great Depression was b/c of too little money.
Federal Reserve Board can change the money supply, so this focuses on monetary policy.
Increase money supply  inflation speeds up
Decrease money supply  inflation slows (or deflation)

5. Fiscal policy “tools”
Remember, fiscal policy refers to taxing and spending
The economy may be going too slow (contracting) or too fast (expanding)
If slow, we go to expansionary fiscal policies (we want to speed it up)…
Cut taxes (less $ for us to spend)
Increase gov’t spending
Tax cuts for individuals is called demand-side economics
Tax cuts for biz & wealthy is called supply-side economics
If fast, we go to contractionary fiscal policies (we want to slow it down)…
Increase taxes (more $ for us to spend)
Decrease gov’t spending

6. Monetary policy “tools”
Remember, monetary policy deals with the (1) money supply and (2) interest rates.
Decisions are made by the Federal Reserve (board, chairman).
There are 12 federal reserve banks/districts.
“The Fed” alters the money supply by…
Easy-money policy – increases the $ supply to boost economic growth (and thus lower unemployment)
Tight-money policy – decrease the $ supply to slow growth (and thus slow inflation)
The Fed also can play with “open market operations”—buy/sell bonds
The Fed also can adjust the reserve requirement of banks

7. Cont. The Fed also adjusts interest rates
The discount rate is the interest rate banks pay the Federal Reserve banks
Lower interest rates – stimulates growth
Higher interest rates – slows growth