Monetary and Fiscal Policy Q&A

1. MONETARY & FISCAL
POLICY Q & A

2. 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.

3. 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.

4. 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.

5. 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

7. 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.

8. 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.

9. 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.

10. 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.