Presentation Transcript

1. Monetary v. Fiscal Policy

2. Who is responsible for monitoring and minimizing the pain of recessions? The Fed uses Monetary Policy (central bank’s control over money supply and interest rates) Government through Fiscal Policy (Government policy regarding taxing and spending to get a stagnant economy moving or to address inflation
3. Monetary Issues: Inflation, deflation, and stagflation Inflation: increase in overall price level of goods and services produced in an economy Hyperinflation: Extreme and rapid rise in prices, where wages don’t keep up Deflation: A fall in the prices of goods and services (opposite of inflation) Stagflation: a combination of economic stagnation or slowdown and high inflation; features include slow or zero economic growth, high unemployment, and rising prices The Fed has quite a job monitoring monetary policy, as changes by the Fed do not have a quick turn around time
4. Fiscal Policy Two types of Fiscal Policy (decisions made by government regarding how much money to spend and how much to collect in taxes): Expansionary: goal is to increase economic activity by increasing government spending and/or cutting taxes Contractionary Fiscal Policy: The goal is to decrease economic activity by raising taxes and/or decreasing government spending
5. Tax Cuts Debate Demand-side economics (Keynesian Economics): Believe the best way to deal with sluggish economy is to stimulate overall demand by cutting individual income taxes Supply-side economics: Believe that the best way to deal with sluggish economy is to stimulate overall supply by cutting taxes on businesses and high-income taxpayers (trickle-down theory)
6. Automatic Stabilizers Help to counter the ups and downs of the business cycle without requiring policymakers to take any action Automatic stabilizers work by increasing or decreasing overall demand In time of economic slowdown, people spend less, businesses lay off workers or decrease salaries, as wages decline some people drop down into a lower tax bracket which gives more money to make up the difference in wage loss Those laid off now apply for unemployment benefits, food stamps, and welfare payments; puts money in people’s pockets, which they spend to help stop the economy from sliding even more
7. Automatic Stabilizers In a strong economy, people make more money, pay higher taxes back to government; slows down available money to spend, thus stabilizing the economy Less people on welfare, food stamps and unemployment payments; decreases government spending as well Automatic stabilizers are good for helping to smooth economic ups and downs, but can’t keep them from happening