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Fiscal and Monetary Policy

Fiscal and Monetary Policy. Chapters 12, 13 and parts of 29 Time Period 2 or 3 weeks. Why do we use money?. Why is there money? —by Steve Reff. Fiscal Policy Video Segment. Fiscal Policy. Fiscal policy is done by CONGRESS—not the FED Stabilization is done by G and T collection

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Fiscal and Monetary Policy

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

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

  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 SRAS PL2 PL1 AD2 AD Y1 Y2 GDPr

  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 SRAS PL1 PL2 AD AD2 Y2 YI GDPr

  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. 

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