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Fiscal and Monetary Policy Chapters 12, 13 and parts of 29 Time Period 2 or 3 weeks. 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? 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. Discretionary Fiscal Policy = changes to G or T are at the option of Congress Two types = expansionary and contractionary 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 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 AD2 Y2 YI AD GDPr 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 2. Money Creation FED loans money directly to the gov’t Does not decrease private Ig or consumption Could increase inflation 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 2. stand idle Withholds purchasing power No chance of inflation 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 Group work There will be 3 large groups You will decide how to split up the work as a group At least half of the group will present Someone will type notes and email it to me TONIGHT so I can make copies Group 1—the smallest group Page 229-230 Built-In Stability Group 2 Pages 230-232 Evaluating Fiscal Policy Stop at recent US fiscal policy Group 3—largest group Pages 233-237 Problems, criticisms and complications OMIT A Political Business Cycle Offsetting State and Local Finance Stop at Supply Side Fiscal Policy