What are the key differences between fiscal and monetary policy?
Fiscal policy is controlled by the government through spending and taxes, while monetary policy is managed by the Federal Reserve using interest rates and the money supply.
Compare the tools used in expansionary fiscal policy and monetary policy.
Fiscal policy uses increased government spending and decreased taxes, while monetary policy uses lower interest rates and increasing the money supply.
Who implements fiscal policy vs. monetary policy?
Fiscal Policy: Congress and the President. Monetary Policy: The Federal Reserve.
What are the similar goals of fiscal and monetary policy?
Both aim to stabilize the economy, achieve full employment, and maintain price stability by influencing aggregate demand.
Contrast the directness of fiscal and monetary policy.
Fiscal policy has a more direct impact on AD through government spending, while monetary policy's impact is more indirect, influencing AD through interest rates and investment.
How does increasing government spending impact AD?
It directly increases AD, shifting the AD curve to the right.
How does decreasing taxes impact AD?
It increases disposable income, leading to increased consumer spending and a rightward shift of the AD curve.
In a recession, should the government increase or decrease spending?
Increase spending to stimulate the economy.
In a recession, should the government increase or decrease taxes?
Decrease taxes to stimulate the economy.
If the economy is below full employment, what type of fiscal policy is appropriate?
Expansionary fiscal policy.
Explain how fiscal policy can help close a recessionary gap.
Expansionary fiscal policy increases AD, shifting it towards the full employment level of output.
What is the goal of using expansionary fiscal policy?
To boost the economy during a recession by increasing real GDP and income.
How does the Fed influence the economy?
By managing interest rates and the money supply to shift Aggregate Demand.
What is the primary goal of both fiscal and monetary policy?
To shift Aggregate Demand to achieve full employment and price stability.
Who controls fiscal policy?
The government (Congress & President).
What is Fiscal Policy?
Government's use of spending and taxation to influence the economy.
What is Monetary Policy?
Actions by the Federal Reserve to manage interest rates and the money supply.
What is Aggregate Demand (AD)?
The total demand for goods and services in an economy at a given price level.
What is Expansionary Fiscal Policy?
Increasing government spending or decreasing taxes to boost the economy.
What is a Recessionary Gap?
When the equilibrium level of output is below the full employment level.
Define government spending (G).
Expenditures made by the government on goods and services.
Define taxes (T).
Compulsory contributions levied by a government on income, profits, or property.
Define real GDP.
A macroeconomic measure of the value of economic output adjusted for price changes (inflation or deflation).
Define the Federal Reserve (The Fed).
The central bank of the United States, responsible for monetary policy.
Define price stability.
A state in which the general price level in an economy does not change much over time.
