1. Fiscal and Monetary Policy
Chapters 12, 13 and parts of 29
Time Period 2 or 3 weeks.

2. Fiscal Policy Fiscal policy is done by CONGRESS—not the FED
Stabilization is done by G and T collection
Can increase employment or reduce inflation
Everything equal, what puts more money in the economy, G or a decrease in T?

3. The Employment Act of 1946
Congress proclaimed gov’t role in promoting max. employment, production and purchasing power
Created the Council of Econ. Advisors to advise the President
Created the Joint Economic Committee of Congress to investigate econ. problems.

4. Discretionary Fiscal Policy
= changes to G or T are at the option of Congress
Two types = expansionary and contractionary

5. Expansionary Policy Used to combat recession Increase G Decrease T
If budget is balanced, a budget deficit is created
Goal is to shift AD to the right PL
SRAS
PL2
PL1
AD2 AD Y1 Y2
GDPr

6. Contractionary Policy
Used to lower inflation
A decrease in G
An increase in T
Goal is to shift AD to the left by taking money out of the system PL
SRAS
PL1
PL2
AD2 AD Y2 YI
GDPr

7. Financing Deficit Spending
1. borrow from the public
Sell bonds to the public
Competes with private businesses
With this added demand for $, interest rates may increase and private Ig may decrease

8. 2. Money Creation FED loans money directly to the gov’t
Does not decrease private Ig or consumption
Could increase inflation

9. What to do with a Surplus
1. Pay off public debt
Buy back bonds
Puts $ back into the system, increases consumption
May offset contractionary policy that created the surplus

10. 2. stand idle
Withholds purchasing power
No chance of inflation

11. Built In Stability--Automatic
1. Income Tax
As income increases, people pay more taxes. This limits the increase in DI and C.
2. Unemployment compensation
The income of unemployed does not fall to zero. UC provides a base level of income.
3. Stocks and Bonds
Dividends do not follow the swings of the business cycle. Bond payments are established at the time the bond is purchased

12. Group work There will be 3 large groups
You will decide how to split up the work as a group
At least half of the group will present
Someone will type notes and it to me TONIGHT so I can make copies

13. Group 1—the smallest group
Page
Built-In Stability

14. Group 2 Pages 230-232 Evaluating Fiscal Policy
Stop at recent US fiscal policy

15. Group 3—largest group Pages 233-237
Problems, criticisms and complications
OMIT
A Political Business Cycle
Offsetting State and Local Finance
Stop at Supply Side Fiscal Policy