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Monetary and Fiscal Policy Scenarios
Scenarios
With your group go over the Year 1 & 2 Scenarios
Use pages 2,4,5,16,17 in your workbook for help with scenarios
Note if your workbook says group 1,2,3….
You must finish Year 1 before you get Year 2
Year 1 Colleges are reporting that 92% of new
graduates are able to find work upon graduation.
Retailers report better than expected sales during the last quarter
Ford has announced a six month delay in filling customer orders for the new Mustang due to heavy sales nationwide.
Six Flags, Inc. has reported average earnings that are 18% higher than last year’s.
Year 2 GE and ATT have both filed for bankruptcy
The number of workers filing for unemployment claims has risen by 18% from the last quarter
New housing starts are at a 10 year low
Consumer confidence has not improved and retailers are expecting Christmas to be the lowest on record.
PEAK
EXPANSION CONTRACTION
TROUGH
Raise Taxes
Cut Spending
Raise Discount Rate
Sell Bonds
Raise Reserve Requirement Lower Reserve Requirement
Lower Discount Rate
Buy Bonds
Lower Taxes
Increase Spending
You want to: Put money INTO the Government/Fed
You want to: Take money OUT OF the Government/Fed
Page 2 Business Cycle
Page 4
Page 5 > Fiscal Policy
Page 5 Fiscal PolicyThe use of the Government budget
(SPENDING) and revenue (TAXATION) to influence the US economy The policy is set by Congress
The policy will be used for the fiscal year
Page 5 > 2 Schools of Thought
John Maynard Keynes
Promoted the use of government spending
Used to affect level of economic activity
Adam Smith
“Invisible Hand” Laissez Faire If left alone,
business cycles will correct themselves over time
Government spends money to provide goods and services
Government pays for those expenditures through taxation and borrowingWhere does the $$ come from?
IndividualsCorporationsFinancial InstitutionsForeign entities or foreign governments
Page 5> Government’s role in Circular Flow….
Type 1: Contractionary Policy -used to slow the economy DOWN and fight inflation during an Expansion
The Government Does 2 things to fix this:
1. Raise taxes- take money OUT of the economy
2. Reduce Government Spending- cutback on funding social programs and business contracts
We then operate at a Budget Surplus raise taxes and cut spending (spend less than you
take in with Taxes) Revenue > Expenditures
Page 5> Two Types of Fiscal (gov’t) Policy
Type 2: Expansionary Policy: used to “jump start” the economy out of a recession. Also fights unemployment & deflation.
The Government does 2 things to fix this:1. Cut Taxes -gives consumers more $ to spend,
save, or invest2. Increase Spending -government spends
more $ (On what ?)
We then operate with a Budget Deficit government spends more $ than it collects in
taxes Revenue < Expenditures
Page 5: Two Types of Fiscal Policy
1. Reserve Requirement- the amount or % of deposits banks are required to keep and not loan out (least used tool)
2. Discount Rate-% rate the FED charges banks on loans, will influence the % rate on all other loans
3. Open Market Operations (government bonds, bills, etc.)- the buying and selling of government securities ( most used tool)
Page 16/17: Monetary Policy3 Tools of Monetary Policy
1.Easy Money Policy - increases the money supply
economy is experiencing contraction & government wants to stimulate the economy
So We… buy government securities lower the discount rate
Creates lower interest rates lower reserve requirement
D. 2 Types of Monetary Policy
Keep the $$ FLOWING!
2.Tight Money policy - reduces the money supply
economy is experiencing a rapid expansion that may cause high inflation and government wants to take money out of circulation
So we… increase reserve requirement increase discount rate
Creates higher interest rates sell government securities
D. 2 Types of Monetary Policy
Keep the $$ AWAY!