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

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fiscal and monetary policy

Fiscal and Monetary Policy

Chapters 12, 13 and parts of 29

Time Period 3 weeks.

fiscal policy
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?
the employment act of 1946
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.
discretionary fiscal policy
Discretionary Fiscal Policy
  • = changes to G or T are at the option of Congress
  • Two types = expansionary and contractionary
expansionary policy
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

contractionary policy
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

AD

AD2

Y2

YI

GDPr

financing deficit spending
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
slide8
2. Money Creation
    • FED loans money directly to the gov’t
    • Does not decrease private Ig or consumption
    • Could increase inflation
what to do with a surplus
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
slide10
2. stand idle
    • Withholds purchasing power
    • No chance of inflation
built in stability automatic
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
group work
Group work
  • There will be 6 groups
  • You will decide how to split up the work as a group
  • Write/type bullet points on important info
  • At least half of the group will present
  • Someone will type notes and email it to me TONIGHT so I can make copies for block day
group1
Group1
  • Page 229-230
  • Built-In Stability
    • Stop at Evaluating Fiscal Policy
group 2
Group 2
  • Pages 230-232
  • Evaluating Fiscal Policy
    • Stop at Problems, Criticisms and Complications
group 3
Group 3
  • Pages 233-234
  • Problems, criticisms and complications
    • Stop at offsetting state and local finance
group 4
Group 4
  • Pages 234-235
  • Crowding-Out Effect
    • Stop at Fiscal Policy, AS and Inflation
    • Please include a graph
group 5
Group 5
  • Pages 235-236
  • Fiscal Policy in the Open Economy
    • Stop at Supply-Side Fiscal Policy
group 6
Group 6
  • Pages 236-238
  • Supply-Side Fiscal Policy