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Monetary vs. Fiscal Policy

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CJ Colicchio

on 6 May 2015

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Transcript of Monetary vs. Fiscal Policy

What is Fiscal Policy?
Unlike Monetary Policy, Fiscal Policy is ran by the Federal government
Types of Fiscal Policy
Expansionary Fiscal Policy
: During a recession, the government will try to boost the economy by:

Cut taxes
(gives people more money to spend)

Increase gov't spending
(buy more goods/services, create jobs, boost production)

In Review...
What is Monetary Policy?
The controlling of the supply of money AND the cost of borrowing money (credit)

These both depend on the needs/status of the economy
Reserve Requirements
How much money is
for a bank to keep on hand (
What are the types of Monetary Policy?
The Federal Reserve (Fed) will enact
Monetary Policy in a
to put money into circulation.
Monetary Policy
Fiscal Policy
On a half sheet of paper, please answer the following questions
Monetary vs. Fiscal Policy
Economics Unit 2-Section 5
The Fed (Federal Reserve) increases or decreases the supply of money
Price Stablility
GDP growth
Fight recession
Desired level of unemployment
Discount Rate
The interest rate that the Fed charges banks for loans
Open-Market Operations
The purchasing or selling of bonds and/or treasury bills
Banks are required to keep a certain percentage of their money in Federal Reserve Banks as well as their deposits from consumers--->
If the Fed raises RR, banks must leave
money with the Fed, having
money to lend to people
In a recession, the Fed lowers the RR, allowing more money to be loaned out to consumers
Federal Funds Rate
(FFR): Money that banks lend each other (Bank of America lending $$ to Chase)

Discount Rate (DR)
: Money that the Fed lends to banks if they are in trouble/have low amounts
In a recession, the DR is lowered so that banks are more likely to lend from the Fed and able to loan money to people.
: "Contract" that you buy from the government that they will buy back later; generate interest over time (many of you probably got this as a gift when you were little)
In a recession, the Fed will buy back bonds from people and hope to stimulate the economy
The Federal Reserve (Fed) will enact
Monetary Policy in an expansion to slow down the economy by taking money out of circulation.
The government helps regulate the money supply through taxation and spending
Fiscal Policy is meant to do two things:

1) Combat inflation during Expansions

2) Reduce Unemployment when GDP falls (Recession)
Fiscal Policy was started by John Maynard Keynes also known as
Keynesian Economics
Contractionary Fiscal Policy
: During an expansion, the government will try to slow the economy by:

Raising taxes
(less money to spend, forcing businesses to lower prices of goods)

Decrease gov't spending
(buy less goods/services, decreasing employment)
1) Who controls Monetary policy? Fiscal policy?

2) What is a reserve requirement? the discount rate? bonds?

3) In both policies, what type is used during expansions? what about in recessions?
Full transcript