Monetary Fiscal

Monetary policy is the way that the government controls the supply of money

The Central Bank of the US (Controls monetary policy)

Create in 1913 by the Federal Reserve Act

Discount rate- fee the Feds charge banks to borrow money 

Reserve rate- amount of cash that the Fed requires banks have on hand   

Open market operations- buying and selling securities/bonds 

During a contraction/trough to make more $ available & stimulate the economy  

Discount rate is lowered --> interest rates lowered --> people save less & borrow/spend more

Reserve rate is lowered --> banks can lend more money --> people can spend more money 

Buy back government bonds --> more cash in circulation 

During an expansion/peak to make less $ available & slow down the economy 

Discount rate raised --> interest rates are raised --> people save more & borrow/spend less

Reserve rate is raised --> banks lend less money -->people spend less money --> helps control inflation

Sell government bonds --> less cash in circulation 

Government adjusting its economic policy

Controlled by Congress

Taxing and spending

Implemented during a recession/contraction to stimulate the economy

Lower taxes on businesses and individuals 

Increase government spending on social programs 

Goal- get $ circulating 

Drawback- increases deficits and debt 

Implemented during an expansion to slow the economy

Raise taxes on businesses and individuals 

Decrease government spending on social programs 

Goal- get people to save more money to avoid inflation  

Drawback- can send the economy into a contraction