How could we fix inflation or unemployment
problems?
FISCAL POLICY (ch. 14B)
 The government use of taxation and spending to increase or
decrease aggregate (overall) demand.
- Balanced budget (gov. spending equal to gov. revenue
or taxes)
- Budget deficit (gov. spends more than it is taking in)
- Budget surplus (gov. spends less than it is taking in)
John Maynard Keynes -> Keynesian Theory – to regulate
recessions, the government should increase spending (add $ to
circular flow), opposite in times of inflation
Expansionary Fiscal Policy- speed up economy
1)
public goods spending (highways, defense, etc.)
2) taxes (tax breaks- Pres. Bush this summer)
 watch out for deficits and inflation!
Contractionary Fiscal Policy- slow down economy
1)
government spending
2) taxes
 difficult to be re-elected to government job
MONETARY POLICY (Ch.14A)
Government actions (Federal Reserve) to change the money supply.
- Velocity of Money- how fast $ moves through
economy.
Milton Friedman- Monetarist- rapid changes in the money supply
causes instability. Money supply should grow about 3-5% each
year to promote growth (more causes inflation, less causes
recession).
Expansionary Monetary Policy adds money to circulation
Contractionary Monetary Policy takes money from circulation.
Tools used to change $$ supply
1) Discount rate- interest loan rate for banks.
* High rate -> less borrowing, less $$ in circulation
* Low rate -> more borrowing, more $$ in circulation
2) Reserve Requirement- Amount of $$ banks are required to keep at the Fed.
*High reserve -> less $$ in circulation
* Low reserve -> more $$ in circulation.
3) Open Market Operations – sales and purchases of marketable federal
securities like bonds, notes, and bills.
*Sell to take $$ out of circulation
*Payback to put $$ in circulation
Problems -> difficult to effect people’s incomes directly,
unintended effects, not good for short term.
How could we fix inflation or unemployment
problems?
FISCAL POLICY (chapter 14B)
 The government use of
or decrease aggregate (overall) demand.
to increase
-
budget (gov. spending equal to gov.
revenue or taxes)
- Budget deficit (gov. spends
than it is taking in)
- Budget
(gov. spends less than it is taking in)
John Maynard
->
regulate recessions, the government should
(add $ to circular flow), opposite in times of inflation
Expansionary Fiscal Policy1)
2)
taxes
economy
 watch out for deficits and inflation!
3)
4)
Fiscal Policy- slow down economy
government spending
 difficult to be
– to
spending
MONETARY POLICY (Ch.14A)
Government actions (
) to change the money supply.
- Velocity of Money-
Milton Friedman- Monetarist. Money supply should grow about
(more causes inflation,
).
in the money supply causes
each year to promote growth
__
Monetary Policy adds money to circulation.
Contractionary Monetary Policy
circulation.
Tools used to change $$ supply
1)
- interest loan rate for banks.
* High rate -> less borrowing, less $$ in circulation
* Low rate ->
2)Reserve Requirement*High reserve ->
* Low reserve -> more $$ in circulation.
3)Open Market Operations – sales and purchases of marketable federal
securities like
.
*
to take $$ out of circulation
*
to put $$ in circulation
Problems ->