1. Fiscal and Monetary Policy

2. Key Terms Review
Federal Reserve (the Fed): the central bank of the U.S. that monitors and stabilizes the economy
Inflation: the rate at which the general prices of goods are rising
Aggregate demand: the total demand for goods and services in the economy at any time

3. Stabilization Policy Recession: Inflation:
Think of the government and the Fed as doctors of the economy. They keep track of vital signs [Inflation, unemployment, etc].
If a problem arises, they step in to prescribe a remedy.
Recession:
The patient is suffering from unemployment [need to jumpstart him]
Inflation:
The patient is suffering from
inflation [need to cool him down]

4. Fiscal Policy
The use of government spending and revenue collection to influence the economy.

5. Fiscal Policy
Includes:
Actions take by the Federal Government: Laws passed by the President or Congress
Tax Policies: how revenue is collected
Any policies regarding government spending: how revenue is spent

6. Things the federal government HAS to spend money on
Fiscal Policy:
Mandatory vs Discretionary Spending
Mandatory Spending
Things the federal government HAS to spend money on
ALWAYS included in the budget

7. Discretionary Spending
Fiscal Policy:
Mandatory vs Discretionary Spending
Discretionary Spending
Anything else where Congress decides where and how much money to spend on things
Deliberate choice and use of federal funds

8. Examples 1.Welfare & food stamps 1.Defense/Military 2. Research
Discretionary Spending
Mandatory Spending
1.Welfare & food stamps
2. Medicaid
3. Retirement for federal employees
4. Social Security
Unempl. check
1.Defense/Military
2. Research
3. Foreign Aid
4. NASA
5.Transportation
6. And much
more!

9. Where Revenues are SPENT
Social Security [20%]
Interest[6%]
Defense [19%]
Medicaid [8%]
Medicare [13%]
Welfare
Unemployment
[16%]

10. Monetary Policy
“Monetary Policy” refers to the actions that the Fed takes to influence the money supply and the rate of inflation in the economy.

11. Monetary Policy Includes:
The Federal Reserve Bank controls/sets the interest rate that banks can borrow and loan money (both the Fed and to each other)
The Fed can use the interest rate to try and control inflation and unemployment

12. Monetary Policy
How does the interest rate effect the economy?
The lower the interest rate i, the more money banks will borrow and loan, which leads to more money in the economy
More money = bigger economy = less unemployment

13. Monetary Policy
BUT, if the economy get TOO big, there will also be inflation! (the general prices of goods will rise!)

14. Monetary Policy
How does the interest rate effect the economy?
The higher the interest rate h, the less money banks will borrow and loan, which leads to less money in the economy
Less money = smaller economy = brings down inflation

15. Monetary Policy
If high interest rates hold the economy back too much, the economy will enter a recession which will lead to higher unemployment!

16. Monetary Policy It’s a balancing act!
The Fed must raise and lower interest rates according to the current conditions of the U.S. economy