Stabilizing the Economy
Fiscal Policy
• Fiscal policy refers to the federal government's
use of taxing and spending policies to help
stabilize the economy.
 The president and congress can raise or lower
taxes or increase or decrease government
spending.
Effects of Fiscal Policy
• Cut Taxes—puts more money in consumers’
pockets. They in turn spend more and spur
the economy.
• Raise taxes—consumers have less money to
spend and the economy slows down.
– Increasing government spending can create jobs
and keeps money flowing.
– Decreasing government spending can have the
opposite effect. Slowing down the economy.
• Increasing government spending can create
jobs and keep money flowing.
• Decreasing government spending can have
the opposite effect
– Slowing down the economy
• Fiscal Policy is slow and it can take several
months to take effect.
Monetary Policy
• Monetary Policy—the attempt to stabilize the
economy by regulating the money supply.
– Trying to regulate the Money Supply is one way to
regulate the ups and downs of the economy. The
money supply is the total amount of money in
circulation at any given time.
– Monetary Policy is carried out by the nation’s
central bank—The federal Reserve
The Federal Reserve System
• This is the central bank of the United States, it
provides financial services to the banking
industry and the government. It also
regulates banks to make sure they follow the
laws.
• Federal Reserve Board—A committee that
consist of seven members who are nominated
by the president and confirmed by the senate.
The Fed and the Money Supply
• The Fed sets monetary policy by taking action
to increase or decrease the money supply.
– The money supply affects the amount of credit
available.
– The amount of credit affects business expansion
and consumer purchasing.
• When the FED increases the money supply
credit is less costly which in turn encourages
consumers to increase spending, businesses to
borrow money for expansion increases jobs
and growth takes place.
• When the FED decreases the money supply,
credit becomes harder for both consumers
and businesses and economic growth takes
place.
• When the FED decreases the money supply,
credit becomes harder for both consumers
and businesses and economic growth is
slowed.
• This is a way to slow inflation.
• The Fed can affect the money supply by selling
or buying government securities in the open
market. This is called the OPEN MARKET
OPERATIONS>
Open Market Operations
 The Fed can affect the money supply by selling or
buying government securities—stock, bonds, and
other financial assets
 Open market operations have an effect on the federal
fund rate. This is the interest rate at which banks lend
money to one another overnight.
 When the Fed decreases the money supply by selling
securities, the federal funds rate goes down.
 Changes in the federal rate tend to trigger changes in
the interest rate.
The Discount Rate
• The interest rate that banks pay to the FED is
called the discount rate. The Fed has the
power to set the discount rate.
Reserve Requirements
• When a person makes a deposit into a
checking or savings account, your money can
then be used by the bank for lending to
business and individuals.
• Federal law states that banks can not lend out
all the money that they take in.
• The portion the government says must be
keep is referred to as the reserve requirement.
Effect on Money supply.
Effects on Consumers
• Fed policy effects you in several areas:
– What you’ll pay for goods and services.
– Your ability to get credit and the interest rate you
pay for credit.
– What you’ll earn in interest.
– Your job stability and the wages you are paid.