MONETARY & FISCAL POLICY Q & A

Q&A:Q: How do countries decide which policy to use (monetary or fiscal?)

!

A: They almost always use a combination of both, but sometimes end goals or political views shape the

policies used.

Q&A:For example, US President Ronald Reagan

was famous for supporting free market enterprise. He wanted the government to become smaller in size. He decided to cut taxes, but NOT to increase government

spending. The tax cuts succeeded at stimulating the economy, and the government did not become more “socialist” or involved in

people’s economic activities.

Q&A:Q: At what speed should monetary or fiscal policy be performed? Is there any

point or figure to start monetary or fiscal policy?

!

A: Government agencies look for signs that the economy my slow down. Signs like the

housing market losing value, or unemployment rates starting to rise a little

faster than normal.

Q&A:Q: What does “government spending” to stimulate

the economy look like? !

A: Government budgets include a lot of different things (see next slide) - and the money they use to stimulate the

economy must come out of the budget. To stimulate the economy, here are examples of what governments might do: 1. Build a new highway or monument 2. Increase the level of government student loans 3. Create more welfare programs to help the unemployed

and struggling 4. Create a new government agency to monitor honesty in

big business transactions

Q&A:Q: What tools are used in Monetary Policy

other than interest rates? A:

1. Open-market operations: the bank sells/buys bonds. If a bank sells a bond to the national government, it

has more money in reserves to lend to people. 2. Reserve Requirements: If banks change the reserve

requirement itself, they will have more/less money available to lend out. Raising the requirement means the banks must keep more money in

storage, and lend less.

Q&A:Q: What does “supply-side” and “demand-side”

fiscal policy refer to? A: Traditional Keynesian fiscal policy emphasizes putting

money into the hands of middle and lower-class consumers, thereby stimulating the “demand side” of the economy. Others argue that more permanent growth is achieved by cutting business and corporate taxes, and by

reducing capital gains taxes and personal income tax rates for wealthier taxpayers. According to these

“supply-side” theorists, the money saved through these sorts of tax cuts will be reinvested in new businesses and large-scale expansion, thus generating more jobs.

Q&A:Q: What is a government bailout,

and does it work? !

A: A 'bailout' is a situation in which a business, individual or government offers money to a failing

business in order to prevent the consequences that arise from a business's downfall. (It is a fiscal policy strategy). Typically, these companies employ a large number of people, leading some people to believe that the economy would be unable to sustain such a huge jump in unemployment if the business failed.

Q&A:The problem with bailouts is that we are attempting to artificially keep a company going, even though demand for what they produce is low. This creates a surplus of goods/services, and pushes the market farther from

equilibrium. !

But, every once and a while, bailouts work. For example, Chrysler, a large U.S. automaker was in need of a bailout in the early 1980s. The U.S. government offered roughly $1.2 billion to the failing company.

Chrysler was able to pay the entire bailout back, and is currently a profitable firm.

!