Monetary policy and

Fiscal policy
Carmella Klien Ganal
BSA-3

Carmella Klien Ganal

 What is monetary policy?
 Monetary policy is how central
banks manage liquidity to create economic
growth.
 Involves influencing the demand and supply
of money through the use of interest rate.

Manage inflation
Reduce unemployment

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 Types of Monetary Policy

1. Contractionary monetary policy to reduce inflation.

money supply interest rates aggregate demand

2. Expansionary monetary policy to lower

unemployment and avoid recession.

money supply interest rates aggregate demand

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 Tools of Monetary Policy

1. OPEN MARKET OPERATIONS

- when central banks buy or sell securities.
Expansionary Contractionary

2. RESERVE REQUIREMENT
- refers to the money banks must keep on hand
overnight. They can either keep the reserve in their
vaults or at the central bank.
Reserve
requirements = Lend more Expansionary

Reserve
requirements = Lend less Contractionary

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 3. Discount Rate

- It's the rate that central banks charge its

members on short-term loans.

- Expansionary

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 What is Fiscal Policy?
• Refers to deliberate manipulation of taxes and government
spending to alter real domestic output and employment ,
control inflation and stimulate economic growth
• Help to reduce budget deficit
• Congress and the President through Federal budget

written document that

indicates the amount of
money the government
expects to receive for a
certain year and
authorizes the amount of
money the government
can spend that year

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 Types of Fiscal Policy

1.Expansionary Fiscal Policy

During contraction or recession, gov’t
can:

1. Decrease Taxes or – favored by

republicans
2. Increase Spending – favored by
democrats

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 Decrease Taxes
Gives people more money to spend

More money = More demand

More demand = More production

More production = More jobs

More jobs = More demand etc.,

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 Increase Spending
Increases demand for goods
More demand = More production
More production = More jobs
More demand
More jobs =
etc.,

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 2. Contractionary Fiscal Policy

During excessive
inflation/expansion. Gov’t can:
1. Increase Taxes
2. Decrease Spending

*Neither party favors this.

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 Increase Taxes
People have less money to
spend
Less Less
=
money Demand
Less Lower
=
Demand inflation
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 Decrease Spending
Less money in economy
Less Less
=
money Demand
Less Lower
=
Demand inflation
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 Thank you, bes!

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 1-2 During excessive inflation/expansion. Gov’t can: (blank) or (blank)
3-4 Monetary policy: Interest rate
Fiscal Policy: (blank) and (blank)
5 In Contractionary Monetary Policy, money supply increases then interest rate
______.
6 In Contractionary Monetary Policy, it lower unemployment. (True or False)

7 As reserve requirement increases, the available cash for lending increases

and this is a monetary tool for ( Contractionary MP or Expansionary MP)
8 As reserve requirement decreases, the available cash for lending decreases
and this is a monetary tool for ( Contractionary MP or Expansionary MP)
9 Tax cut (Contractionary FP or Expansionary FP)
10 Buying securities (Contractionary MP or Expansionary MP)

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 1-2 Increase Tax And Decrease Spending
3-4. Taxes And Gov’t Spending
5. Decreases
6.False
7. Expansionary MP
8. Contractionary MP
9. expansionary FP
10. Expansionary MP

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