Econ: Fiscal and Monetary Policies Review 3

The federal government and policymakers use fiscal policy to stimulate or slow down the economy.

  • Expansionary fiscal policy tools: increased government spending, tax cuts
  • Contractionary fiscal policy tools: decreased government spending, tax increases Automatic stabilizers can also serve to expand or contract the economy, because they increase or decrease overall demand.

The Federal Reserve uses monetary policy to stabilize the economy by managing the growth of the money supply and interest rates.

  • An easy-money policy is an expansionary monetary policy that speeds the growth of the money supply to prevent recession.
  • A tight-money policy is a contractionary monetary policy that slows the growth of the money supply to prevent inflation.

The Federal Reserve’s most common policy tool is open-market operations, or the buying and selling of government securities. Through open-market operations, the Fed can target the federal funds rate. Other policy tools include the power to establish bank reserve requirements and the discount rate.

Chapter 14 Quiz – Tuesday 12/6


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