Download 5/7 Warm Up

5/7
Warm Up
What monetary
policy tools can
the Fed use to
slow down rapid
economic growth?
Answers
The Fed can slow down
economic growth by decreasing
the money supply
1. Increase reserve requirements
2. Raise discount rate for
borrowing reserves
3. Sell government securities in
the open market
Objectives
• To identify the tools of fiscal &
monetary policy
• To explain how economic
stabilization tools affect the
money supply, interest rates, &
aggregate demand
• To analyze economic data to
determine how fiscal &
monetary policy should be used
to correct economic problems
Changing the Money Supply
The Fed & Monetary Policy
Monetary Policy Tools
• Changing reserve
requirements
–Fed regulation that
banks must keep %
of deposits as cash
in their own vaults
or in Federal
Reserve Bank
Monetary Policy Tools
• Changing discount
rate
–Interest rate Fed
charges on loans to
banks
• How do consumers
respond to high
interest rates?
–Spend less & save more
Monetary Policy Tools
• Open market operations
– Buying & selling of U.S. securities
by the Fed
– “open” b/c anyone can buy
securities
– When bank buys securities from
the Treasury, purchase amount is
deducted from the bank’s reserves
• Result is the bank will have less $ to
lend out
Economic Problem Solving
Advising the Fed
Changing the Money Supply
Congress, the President & Fiscal Policy
Fiscal Policy
• Federal government’s
use of taxation &
spending policies to
stabilize the economy
The Great Depression
When the stock market crashed,
Herbert Hoover was the president.
Economists at this time
believed that if left alone, the
economy would correct itself –
laissez faire approach.
In 1936 the economist John
Maynard Keynes introduced a
new theory.
Keynesian School of Econ
According to Keynes,
what should the gov’t
do to taxes & gov’t
spending during a time
of recession? During a
period of rapid
inflation?
Recession
• Reduce taxes &
increase gov’t
spending
• What effect will
this have on the
money supply?
Rapid Inflation
Increase taxes and
reduce government
spending
The Great Depression
In what ways
did FDR
implement
Keynesian
approach to
economic
recovery?
2001 Recession Questions
1. What are two reasons Pres.
Bush gives to justify his tax
relief program?
2. Why did Pres. Bush
discourage a tax increase?
3. Why would the FED lower
open market security rates
after 9/11?
Summary
Which policy seems
more effective in
regulating the
economy—fiscal or
monetary?