YOUR GUIDE TO:

GOVERNMENTS USE OF FISCAL

AND MONETARY POLICY
 Terms to Know

Economic Depression - sustained, long-term downturn in economic

activity in one or more economies

Recession - slowdown in economic activity over the course of a normal business cycle.

Inflation - Inflation is the rate at which the general level of prices for goods and
services is rising and, consequently, the purchasing power of currency is falling.

Government Bonds - a way the government borrows money to pay for their
spending. They issue “bonds” which pay a fixed interest rate to investors who buy
them. This does lead to an increase in the debt.

Graduated Income Tax - income tax where wealthier tax payers pay their income
taxes at higher rates.

Aggregate Demand - total demand for final goods and services in an economy at a
given time.

Public Good - goods and services provided directly to the economy. Ex.
military defense, bridges, police & fire protection, public television…
 - Fiscal Policy -
Spending and Taxing policy that the government uses to
maintain economic stability and foster economic growth. 3
Branches influence this policy through raising and lowering taxes
and Public Goods

Expansionary Monetary Policy - purpose is to stimulate the economy and create

more growth.

Government should
spend more than it
receives in taxes
Reduce taxes

Consumer
demand Government
IN AN
creates more hires more
ECONOMIC
production workers, buys
jobs DEPRESSION more goods

More people are

employed; they buy
more goods
Contractionary Monetary Policy - purpose is to slow the economy

Increase taxes
Governments should
spend less than it
receives in taxes

Reduced
Consumer IN AN Consumers
Demand INFLATIONARY will spend
leads to PERIOD less
lower prices

Business spend
and borrow
less
 - Monetary Policy -

Ability to control the nations money supply in order to promote

economic growth and stability. This is done by the Fed a
government agency that is independent of the 3 branches.

Federal Reserve System - central bank of the United States who’s aim is to
regulate the nations supply of money. Goal is to influence the economy to
achieve full employment and stable prices.
ar
policy contraction 9
jury Federal Reserve
puts more money
Federal Reserve
Monetary
reduces the
into circulation
money supply
p
Consumers IN AN Economic
borrow more Interest growth is IN AN e
ECONOMIC Interest
to spend more rates go
s
O on cars, DOWNTURN down
slowed to
avoid
ECONOMIC
UPSWING
rates rise f
homes, etc. inflation

Businesses
borrow more;
Businesses
stimulating the
borrow less
economy
w
 3 Tools of the Federal Reserve
1. Reserve Requirement - a portion of money that the Fed requires banks
to keep in reserve at the Fed in the event people want to withdraw
their money. Adjusting the Reserve Requirement is a way the Fed can
impact the economy.

Federal Reserve Federal Reserve

DECREASES the INCREASES the
reserve requirement Reserve
Requirement
Consumers Economic
IN AN Banks have Banks
borrow more growth is IN AN
more have less
to spend more ECONOMIC slowed to ECONOMIC
money to money to
on cars, homes, DOWNTURN avoid
lend UPSWING lend
etc. inflation

Businesses
borrow more; Businesses
stimulating the borrow
economy less
 3 Tools of the Federal Reserve

2. Discount Rate - the rate of interest the Fed charges banks on

loans they get to increase the amount of money they have to lend.
This rate can be adjusted to impact the economy

Federal Reserve
Federal Reserve
DECREASES the
INCREASES the
Discount Rate
Discount Rate

Consumers Economic
IN AN Banks can Banks are
borrow more growth is IN AN
borrow charged higher
to spend more ECONOMIC slowed to ECONOMIC
money at a rate to borrow
on cars, homes, DOWNTURN avoid
lower rate UPSWING from the Fed
etc. inflation

Businesses
borrow more; Businesses
stimulating the borrow
economy less
 3 Tools of the Federal Reserve
3. Open Market Committee - organization of the Fed that buys and
sells government bonds on the open market. This is done to
impact the economy.

Open Market
Open Market
Committee BUYS
Committee SELLS
government
government
securities (Bonds)
securities (Bonds)
Consumers pumps money
Economic
borrow more IN AN into the IN AN Brokers pay for
growth is
to spend more ECONOMIC economy bonds taking
slowed to ECONOMIC
on cars, homes, DOWNTURN banks have money out of
avoid UPSWING
etc. more money their bank
inflation
to lend accounts
Businesses Banks have
borrow more; less money
stimulating the to lend…
economy Businesses
borrow less
Economic Conditions Government Actions

Weak economy Increase Government Spending

Expand the Economy

Depression/Recession Lower Taxes

Stimulate
Grow
Economic Downturn Lower Discount Rate (interest rate)

Sluggish Economy Lower Reserve Requirement

High Unemployment Buy Treasury Bonds

Slow Down the Economy

Rising Inflation Decrease Government Spending
Contract

Economy growing too fast Increase Taxes

Shrink

Economy is expanding Increases Discount Rate (Interest)

Economic Upswing Increase Reserve Requirement

Sell Government Securities

 Raise Dis
rate
Lower raise
res
D s rate req
Lower
res req
a
Encourage Encourage
Spending Savings
Lowerintrest raise intrest
rates rates

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urn
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