Fiscal and Monetary Policy

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

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

Forms of Monetary policies:

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

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

2. 2) Set discount rate- % interest to charge banks for gov’t loans

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

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

   1. high RR = 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 rate for all

Inflation

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

US Securities being sold

IOU’s delivered to people willing to lend gov $$.

Discount Rate

-% interest to charge banks for gov loans

Reserve Requirement %

-% of $ banks must keep in their vaults