1. Fiscal and Monetary Policy
Unit 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 “levers” the gov’t can push/pull 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 alter 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 (more $ for us to spend)
Increase gov’t spending (more $ tossed out there)
Tax cuts for individuals  demand-side economics
Tax cuts for biz & wealthy  supply-side economics
If fast, we go to contractionary fiscal policies (we want to slow it down)…
Increase taxes (less $ for us to spend)
Decrease gov’t spending ($ is NOT tossed out there)

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” (1) alters the money supply by…
Easy-money policy – increases the $ supply to boost economic growth (more $ is tossed out there)
Tight-money policy – decrease the $ supply to slow growth (less $ is tossed out there)

7. Cont. (other tricks)
Where’s the $? Gov’t holdin’ it back OR in people’s hand?
SLOWS ECONOMY SPEEDS UP ECONOMY
The Fed also can play with “open market operations”—buy/sell bonds (causes $ to get tossed out there, or not)
The Fed also can adjust the reserve requirement of banks (ditto)
The Fed also (2) adjusts interest rates (ditto)
The discount rate is the interest rate banks pay the Federal Reserve banks (the rate the “little” banks pay to the “big” banks)
Lower interest rates  stimulates growth b/c we take loans to buy
Higher interest rates  slows growth b/c we don’t take loans, instead we save our money

8. National Debt Is the debt okay like Keynes said?
How big is it? Look: