Fiscal and Monetary Policy

Discretionary Spending

Lawmakers can spend money where they like

Automatic stabilizer

Act to stabilize economic cycles and are automatically triggered without additional government action

Fiscal Policy

The government purposely use taxes and it’s spending to affect the economy

Monetary policy

Federal Reserve’s actions and communications to promote maximum employment, stable prices, and moderate long term interest rates.

Expansionary Fiscal Policy

Stimulate the economy by increasing aggregate demand

Contractionary Fiscal Policy

Decrease aggregate demand to control inflation because the economy is growing too rapidly

Classical Economics

A school of thought based on the idea that free markets regulate themselves

Keynesian Economics

A school of thought that uses demand-side theory as the basis for encouraging government action to help the economy

Supply Side Economics

Provide incentives to PRODUCERS to increase aggregate supply

Demand Side Economics

A plan to stimulate aggregate demand

Expansionary Monetary Policy

Increase the money supply to increase AD

Contractionary Monetary Policy

Decrease the money supply to decrease AD

The Fed (Federal Reserve)

The central (main monetary authority) bank of the United States

Federal Open Market Committee

Made up of:

• 7 board of governor members

• President of the Federal Reserve Bank of New York

• 4 other Reserve Bank presidents (rotates

Role of the FOMC (Federal Open Market Committee)

• Whether to maintain or after the current monetary policy

• Buying or selling U.S. government securities (bonds) on the open market to achieve this objective

Discount Rate

The interest rate that the federal reserve changes commercial banks for loans

Remember

• If the discount rate is increase, so will the interest rates for customers, and borrowing will decrease

• If the discount rate is decrease, so will the interest rate for customers, and borrowing will increase