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!