Fiscal Policy
- expansionary fiscal policy
  - raises government spending/ decreases taxes in order to increase spending
- contractionary fiscal policy
  - decreases government spending and increases taxes in order to decrease spending in the economy
Monetary Policy
- bonds
  - a way for government and business to borrow money
  - each bond has a par value (stated/ face value; represents principal of the loan), a date to maturity (ranges from 90 days - 30yrs), a coupon (a promise to pay a certain amount of money each year to the bondholder until maturity; represents interest), and a promise to repay the par value (principal) on the maturity date
  - issuing government/ business sells the bonds in the bond market for a price determined by supply and demand
  - money received from the sale represents the principal of the loan, the annual coupon pa
- in the US, the Federal Reserve System (Fed) implements monetary policy by changing the level of money in the banking system using:
  - open-market operations
    - Fed's buying/ selling of US Gov. bonds in the open market to influence the amount of reserves in the banking system and the banking system's ability to extend credit and create money
    - to expand the economy, Fed would buy bonds
    - to contract economy, Fed would sell bonds
  - reserve ratio
    - Fed can set legal reserve ratio for both member/ non-member banks to influence the level of excess reserves in the banking system and consequently the banking system's ability to extend credit and create money
    - to expand the economy, the Fed would reduce the reserve requirement
    - to contract the economy, the Fed would raise the reserve requirement
  - discount rate
    - Fed acts as a "lender of the last resort" to banks
    - banks needing reserves can borrow from the Fed and the interest rate that the Fed charges on these loans is called the discount rate
    - to expand the economy, the fed would lower the discount rate which would make it less "painful" for member banks to borrow from the Fed lead to lower interest rates/ credit requirements, a higher money supply, and greater spending
    - to contract economy, the Fed would raise the discount rate

	Created by Jasmine M. over 3 years ago

Business/Economics Note on C.2 Economics, Skill #4- Notes, created by Jasmine M. on 16/03/2021.