1. U.S. Economic Policy

2. Goals Promote Maximum Employment Promote Maximum Production
Fight Inflation

3. Instruments to achieve goals
Provide Goods
Military/defense, police, firefighters, public parks, bridges
Redistribution of Income
Graduated tax – wealthy pay more
Regulate Economic activities
Prohibit monopolies, consumer protection (EPA, FDA)

4. Fiscal Policy Government Taxing and Spending Policies
2 types of Economic Policies
Expansionary policies – using taxing and spending to stimulate the economy and create growth
Recession/Depression
Businesses closing
Unemployment rising
Contractionary policies – using taxing and spending to slow growth
Inflation
Production and sales are strong
Consumers have too much money to spend

5. Contracting Economy v. Expanding Economy
spend more $
decrease taxes
Objective: Increase consumer demand
Spend less $
Increase Taxes
Objective: Reduce consumer demand
Gov should spend more than it receives in taxes
Gov hires more workers, buys more goods
More people are employed; new workers buy more goods
Consumer demand creates more production jobs
Gov should spend less than it receives in taxes
Consumers will spend less money
Businesses will spend and borrow les
Reduced consumer demand leads to lower prices
During an Inflationary Period
In a Depression

6. Monetary Policy Controlling the money supply
2 types of Economic Policies
Expansionary policies – using the discount rate, reserve requirement and Open Market Operations to stimulate the economy and create growth
Recession/Depression
Businesses closing
Unemployment rising
Contractionary policies – using the discount rate, reserve requirement and Open Market Operations to slow growth
Inflation
Production and sales are strong
Consumers have too much money to spend

7. Monetary Policy Tools Adjusting the Reserve Requirement
Money that banks keep out of circulation-- a portion of their deposits
Adjusting the Discount Rate
Rate of interest that Federal Reserve charges banks on loans
Open Market Operations
Buying or selling of government bonds

8. Federal Reserve
Federal Reserve regional banks that serve as “bankers bank”
Independent Agency
Established by Wilson
President appoints chairman
Controls the money supply

9. Contracting and Expanding the Economy
Increasing Reserve Requirement
Increase the Discount Rate
Sell government Bonds
Decrease Reserve Requirement
Decrease the Discount Rate
Buy Government Bonds
Federal Reserve reduces the money supply
Interest rates rise
Businesses borrow less
Economic growth is slowed to avoid inflation
Federal Reserve puts more money into circulation
Interest rates go down
Businesses borrow more; stimulating production
Consumers borrow more to spend more on cars, homes, etc.
During an Inflationary Period
In a Depression

10. Fiscal – federal government tax and spend policies
Expand Economy
Increase demand
Contract Economy
Decrease demand
Taxes
Decrease
Increase
Spending
Monetary – federal reserve regulating the amount of money in circulation
Interest Rate
Reserve Requirement
Gov’t Bonds
Buy
Sell