Fiscal & Monetary Policy - Honors Gov

expansionary policies

involve increasing government spending and/or lowering taxes in order to “expand” the amount of $ in the economy

contractionary policies

involve decreasing government spending and/or increasing taxes in order to “contract”/shrink the amount of $ in the economy

Fiscal policy

use of tax policy and spending policy in order to impact the economy

The Federal Reserve

an organization that controls monetary policy

Monetary policy

different ways to expand or contract the economy, set by The Fed

The Fed sells securities

IOUs delivered to people willing to lend the government their $

Impact of IOUs

more sold = less $ in people’s hands = lower $ supply

The Fed sets discount rate

% interest to charge banks to gov’t loans

Impact of discount rates

high % rate = less loans to banks = less loans to people

The Fed sets reserve requirements

% of $ banks must keep in their vaults

Impact of reserve requirements

High r.r. = banks keep more in vaults = less money loaned out to people

Progressive tax

higher earners pay higher rates

Regressive tax

higher earners pay lower taxes

Flat tax

same tax rates to all (%)

example of progressive tax

income tax on individuals

example of regressive tax

payroll tax to fund Social Security

example of flat tax

income tax on corporations

Inflation

an increase in the money supply, and as a result, a decrease in the value of money

Law of demand

demand goes up, price goes up; demand goes down, price goes down

Law of supply

supply goes up, price goes down; supply goes down, price goes up