ECON 1 Lecture Notes - Lecture 22: Dot-Com Bubble, Fiscal Policy, Monetary Policy

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26 May 2018

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#22 Thursday 4/19 (Ch.34 Economic Policies)

What can policy do to fight recessions?

● Fiscal policy

● Monetary policy

Stabilizing the Economy

● In some years the economy is too weak

○ Unemployment

○ Low wages

○ Poverty

Example: Great Recession 2008-2011

● In other years the economy is too strong

○ Inflation

○ Bubbles

Example: Dot Com Boom 1998-2000

● Government can try to stabilize the economy

Two Policies to Stabilize the Economy

● Monetary policy

○ Federal Reserve Bank (Fed)

○ Controls money supply and interest rates

○ Can lower rates when economy is weak; increase rates when economy is too strong

● Fiscal Policy

○ Federal government

○ Controls public spending and taxes

○ Can increase spending when economy is weak; reduce spending when economy is too strong

Monetary Policy

●In the long run it can not increase output or jobs (long-run determined by LRAS)

● But in the short run it can.

● Example: Great Recession (2008-2011)

High unemployment, widespread poverty

● Massive expansion of money supply by the Fed → low interest rates → more investment → more

aggregate demand → more output and jobs (increasing aggregate demand by making investment

cheaper)

○ Helped the US get out of deep recession

○ Recovery continues today

● The Fed controls the Money Supply (MS)



This allows the Fed to influence the interest rate.

● If Fed increases MS → interest rate declines → AD curve shifts right

● Goal: to reduce unemployment in the short run, the Fed use monetary policy to shift the AD curve

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Document Summary

In some years the economy is too weak. In other years the economy is too strong. Government can try to stabilize the economy. Can lower rates when economy is weak; increase rates when economy is too strong. Can increase spending when economy is weak; reduce spending when economy is too strong. In the long run it can not increase output or jobs (long-run determined by lras) But in the short run it can. Massive expansion of money supply by the fed low interest rates more investment more aggregate demand more output and jobs (increasing aggregate demand by making investment cheaper) Helped the us get out of deep recession. The fed controls the money supply (ms) this allows the fed to influence the interest rate. If fed increases ms interest rate declines ad curve shifts right. Goal: to reduce unemployment in the short run, the fed use monetary policy to shift the ad curve.

Related Questions

In an effort to move the economy out of a recession, the federal government would engage in expansionary economic policies. Respond to the following points in your paper on the actions the government would take to address expansionary fiscal and monetary policies:

Expansionary Fiscal Policy:

Explain the actions the federal government would take while engaging in expansionary fiscal policy in terms of the following:

The necessary change in taxes and government spending,

The effect on aggregate demand, GDP, and employment.

Expansionary Monetary Policy:

The three tools the Federal Reserve Bank (The Fed) uses when conducting monetary policy are the required reserve ratio, the discount rate, and open market operations.

Explain the actions of the Fed in regard to the three tools.

When the required reserve ratio is increased or decreased

When the discount rate is increased or decreased

Buying or selling government securities when conducting expansionary monetary policy

Explain how these actions would affect the money supply, interest rates, spending, aggregate demand, GDP, and employment.

raspberrygoose799

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease

sapphirecrow883

TRUE or FALSE?

1. Real GDP can never be greater than potential GDP.

2. When foreign countries experience an increase in income, this is likely to increase our GDP.

3. The United States economy spends about as many months in recession as it spends in expansion.

4. If individuals decrease their consumption spending then this is likely to reduce the growth rate of GDP, all else the same.

5. Movements of real GDP around potential GDP are called the business cycle.

6. If total government spending in a given year was $3.7 trillion, then all of this spending counted directly in GDP as part of the government spending (G) category.

7. The last recession in the United States began in December of 2007.

8. During a recession, the inflation rate tends to decline.

9. Changes in spending that cause firms to change their level of production of goods/services are called supply shocks.

10. All else the same, an increase in income in the United States leads to a decrease in our net exports.

11. Since 1929 there have been 14 declared recessions in the United States.

12. Total spending in the economy is equal to consumption + investment + government spending - net exports.

13. During each recession, potential GDP falls.

14. Percentage wise, the government collects more tax from individuals than it does from firms.

15. During a recession, the Federal Reserve pursues contractionary monetary policy.

16. During a recession, the Federal Reserve is most likely to sell government bonds to the public.

17. Investment spending increases during periods of recession.

18. Congress meets about every 6 - 8 weeks to discuss the performance of the economy and potential changes to fiscal policy.

19. If there is more competition among firms, then the inflation rate will tend to increase.

20.The demand for labor increases when the economy is in an expansionary phase.

21. Total spending by the government is about 20% of GDP in the US economy.

22. The unemployment rate decreases during periods of expansion.

23. If oil prices increase by 20% then this is an example of a supply shock.

24. When the Federal Reserve buys government bonds, interest rates are likely to fall.

25. If Congress wanted to help the economy out of a recession, they would be most likely to reduce government spending and/or increase taxes.

Falsenot in accordance with the fact or reality or actualityMore (Definitions, Synonyms, Translation)

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ECON 1 Lecture Notes - Lecture 22: Dot-Com Bubble, Fiscal Policy, Monetary Policy

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