1. FISCAL AND MONETARY POLICY BY: WINSTON A. GUILLEN

2. MACRO-ECONOMIC GOALS OF THE ECONOMY Full-employment Full production Price stability Rapid growth

3. Growth/ Output TIME/PERIOD BUSINESS CYCLE 1 st Phase2 nd Phase3 rd Phase

4. 1 st Phase The first phase is expansion when the economy is growing along its long term trends in employment, output, and income At some point the economy will overheat, and suffer rising prices and interest rates until it reaches a turning point -- a peak -- and turn downward into a recession (the second phase)

5. 2 nd Phase Recessions are usually brief (six to nine months) and are marked by falling employment, output, income, prices, and interest rates. Most significantly, recessions are marked by rising unemployment. The economy will hit a bottom point -- a trough -- and rebound into a recovery (the third phase).

6. 3 rd Phase The recovery will enjoy rising employment, output, and income while unemployment will fall. The recovery will gradually slow down as the economy once again assumes its long term growth trends, and the recovery will transform into an expansion.

7. Approaches to Macro-economic Management Laissez faire. Before the Great Depression in the United States, the government's approach to the economy was laissez faire Keynesian Economics. But following the Second World War, it was determined that the government had to take a proactive role in the economy to regulate unemployment, business cycles, inflation and the cost of money. By using a mixture of both monetary and fiscal policies governments are able to control economic phenomena. British economist John Maynard Keynes’ theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when at a level between 2-3%), increases employment and maintains a healthy value of money.

8. HOUSEHOLD BUSINESS Income payments Factor services Goods and services Consumption expenditure

9. HOUSEHOLDBUSINESS Income payments Factor services Goods and services Consumption expenditure CAPITAL MARKET MONETARY POLICY INTENDED INVESTMENT SAVING

10. HOUSEHOLD (deposable income ) BUSINESS (production) Income payments Factor services Goods and services Consumption expenditure CAPITAL MARKET MONETARY POLICY INTENDED INVESTMENT SAVING GOVERNMENT PURCHASES TAXES FISCAL POLICY

11. C, S, I, G Y Y = C + S S C

12. C, S, I, G Y Y = C + S S C I C + I

13. C, S, I, G Y Y S C I C + I C + I + G Full Employment gap

14. C, S, I, G Y Y S C I C + I C + I + G Full Employment gap

15. Basic Tools of Fiscal Policy Increase or Decrease of Government Spending Increase or decrease of Taxation Balanced-Budget Policy and the “balance budget multiplier” Pump Priming

16. Built-in Stabilizers: Progressive taxation Social Insurance and Welfare Services Agricultural Support Policies Leakages in the Private Sector

17. Tools of Monetary Policy Control of Money Supply through open market operations Changes in the required bank reserve requirement Changes in the Rediscount Rate Moral Suasion

18. To Summarize: The government manages the overall pace of economic activity, seeking to maintain high levels of employment and stable prices & has two main tools for achieving these objectives: FISCAL POLICY, through which it determines the appropriate level of TAXES and SPENDING; and MONETARY POLICY, through which it manages the SUPPLY of money.

19. Fiscal Policy vs Monetary Policy A Balancing Act

20. When the Economy has slowed down. ( Unemployment levels are up, consumer spending is down and businesses are not making any money) Appropriate Fiscal Policy? Appropriate Monetary policy?

21. When Inflation is too strong (very high prices real value of money and income id down) Appropriate Fiscal Policy? Appropriate Monetary policy?

22. Thank You

26. When the Economy has slowed down A government thus decides to fuel the economy's engine by decreasing taxation, giving consumers more spending money while increasing government spending in the form of buying services from the market (such as building roads or schools). By paying for such services, the government creates jobs and wages that are in turn pumped into the economy. –pump-priming In the meantime, overall unemployment levels will fall. With more money in the economy and less taxes to pay, consumer demand for goods and services increases. This in turn rekindles businesses and turns the cycle around from stagnant to active. If, however, there are no reins on this process, the increase in economic productivity can cross over a very fine line and lead to too much money in the market. This excess in supply decreases the value of money, while pushing up prices (because of the increase in demand for consumer products). Hence, inflation occurs.

27. When Inflation is too strong The economy may need a slow down. In such a situation, a government can use fiscal policy to increase taxes in order to suck money out of the economy. Fiscal policy could also dictate a decrease in government spending and thereby decrease the money in circulation. Of course, the possible negative effects of such a policy in the long run could be a sluggish economy and high unemployment levels. Nonetheless, the process continues as the government uses its fiscal policy to fine tune spending and taxation levels, with the goal of evening out the business cycles.