Fiscal & Monetary Policy

Expansionary policies

Involve increasing government spending and/or lowering taxes in order to “expand” the amount of money in the economy.

Contractionary policies

Involve decreasing government spending and/or increasing taxes in order to “contract”/shrink the amount of money in the economy.

Fiscal policy

Use of tax policy and spending policy in order to impact the economy.

Monetary policy

The Federal Reserve is the government agency that sets “monetary policy”. Like fiscal policy, monetary policy can be used to expand or contract the economy.

Progressive tax

Higher earners pay higher rates.

Regressive tax

Higher earners pay lower rates. Ex: Payroll tax to fund Social Security.

Flat tax

Same tax rates to all. Ex: Income tax on corporations.

Inflation

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

US Securities being sold

Sell securities- IOUs delivered to people willing to lend the government their $

US Securities being sold; Impact on the economy if this # goes up.

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

US Securities being sold; Impact on the economy if this # goes down

Less sold = more $ in people’s hands = more $ supply

Discount Rate

Set discount rate- % interest to charge banks for government loans

Discount Rate; Impact on the economy if this # goes up

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

Discount Rate; Impact on the economy if this # goes down

Low % rate = more loans to banks = more loans to people

Reserve Requirement %

Set reserve requirement- % of $ banks must keep in their vaults

Reserve Requirement %; Impact on the economy if this # goes up

High RR = banks keep more in vaults = less $ loaned out to people

Reserve Requirement %; Impact on the economy if this # goes down

Less RR = banks keep less in vaults = more $ loaned out to people

reacts to economic situations and ignores political implications (President)

The Fed is independent, and therefore…