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

2. Why do we use money? Why is there money?—by Steve Reff Why is there money?

3. Fiscal Policy Video Segment

4. 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?

5. 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.

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

7. 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 GDPr AD SRAS AD2 Y1 PL1 Y2 PL2

8. 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 GDPr AD SRAS AD2 YI PL1 Y2 PL2

9. 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

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

11. 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

12. 2. stand idle  Withholds purchasing power  No chance of inflation

13. 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

14. Group work There will be 3 large groups You will decide how to split up the work as a group Everyone will present some part of the notes One person needs to email their group notes tonight

15. Group 1—the smallest group Page 229-230 Built-In Stability

16. Group 2 Pages 230-232 Evaluating Fiscal Policy

17. Group 3—largest group Pages 233-238 Problems, criticisms and complications OMIT  A Political Business Cycle  Offsetting State and Local Finance

18. ALL GROUPS First group to correctly finish the US Coins and Currency worksheet will get 2% added on the next test. GOOD LUCK.