1. Fiscal and Monetary Policies The Government’s Role In the Economy

2. DRILL: What is the message the cartoonist is implying?

3. 3 Goals of Economic Policy We have a mixed-market economic system Government’s role in the economy is to: 1. Promote steady growth (grow our economy) 2. Keep people employed (full employment) 3. Keep inflation low (price stability)

4. The Business Cycle:

5. The Business Cycle: Vocab! Peak: _________________________________ Trough: _______________________________ Expansion (Recovery):____________________ _______________________________________ Contraction: ____________________________ _______________________________________ Recession: ____________________________

6. ADD THESE: Economic Indicators GDP – Gross Domestic Product Measures how well the economy is doing Total output (industry & services) of a country in one year CPI – Consumer Price Index Measures inflation Unemployment Rate – unemployed ppl Measures the # of ppl who are out of work that want a full-time job

7. Fiscal Policy & Monetary Policy Congress and the President use taxes and government spending to achieve economic growth, full employment, and stable prices Federal Reserve uses reserve requirements, discount rate, and open market operations to achieve economic growth, price stability, and full employment

8. Fiscal Policy Congress and the President use taxes and government spending to achieve economic growth, full employment, and stable prices

9. Expansionary & Contractionary Fiscal Policy Decrease taxes – people give less $ to the gov’t, so: People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase Increase taxes – people give more $ to the gov’t, so: People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease

10. Expansionary & Contractionary Fiscal Policy Increase gov’t spending – will create more jobs, so: People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase Decrease gov’t spending – will create less jobs, so: People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease

11. Advantages of Fiscal Policy Helps the gov’t achieve its economic goals: Growth (GDP) Stability (Prices) Full employment

12. Monetary Policy

13. Federal Reserve uses reserve requirements, discount rate, and open market operations to achieve economic growth, price stability, and full employment Reserve requirements Discount rate Open market operations

14. The Federal Reserve It is the central bank of the United States It’s job is to balance between rapid growth and recession If money and credit grows too rapidly, inflation can result If money and credit grows too slowly, it can cause a recession Uses three main tools: 1. Reserve Requirement 2. Open Market Operations 3. The Discount Rate (Interest Rates)

15. Reserve Requirement – the amount of $ banks must keep in their vaults “Fed” decreases the reserve requirement, so: Amount of $ the banks can lend people goes up Amount of $ in circulation goes up People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase “Fed” increases the reserve requirement, so: Amount of $ the banks can lend people goes down Amount of $ in circulation goes down People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease

16. Discount Rate – the interest rate the “Fed” charges other banks “Fed” decreases the discount rate – ordinary banks borrow more $ from the “Fed”, so: Amount of $ the banks can lend people goes up Amount of $ in circulation goes up People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase “Fed” increases the discount rate – ordinary banks borrow less $ from the “Fed”, so: Amount of $ the ordinary bank can lend people goes down Amount of $ in circulation goes down People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease

17. Open Market Operations – people/businesses buy treasury bonds from the “Fed” “Fed” sells treasury bonds, causing people/businesses to buy them, so: Amount of $ in circulation goes down People spend less $ in stores Items in stores are in less demand Companies produce less GDP will decrease “Fed” buys treasury bonds, causing people/businesses to sell them, so: Amount of $ in circulation goes up People spend more $ and in stores Items in stores are in more demand Companies produce more GDP will increase

18. Advantages of Monetary Policy Helps the gov’t achieve its economic goals: Growth (GDP) Stability (Prices) Full employment