Lecture Notes: Fiscal and Monetary Policy

Introduction

• Speaker: Mr. Clifford
• Platform: ACDC Econ
• Topic: Review of Fiscal and Monetary Policy in Macroeconomics

Purpose of Macroeconomics

• Goals:
  • Measure the overall economy.
  • Fix economic problems.
• Economic States: Three Possibilities
  • Recession
  • Full Employment
  • Inflationary Gap

Addressing Recession

Options

1. No Policy:
   • Wait for self-correction.
   • High unemployment leads to lower wages and resource prices.
   • Aggregate Supply (AS) shifts right, returning to full employment over time.
2. Fiscal Policy:
   • Tools: Government spending and taxation.
   • Increase government spending or cut taxes to stimulate the economy.
   • Lowering taxes increases consumer spending, shifting Aggregate Demand (AD) right.
3. Monetary Policy:
   • Control money supply to affect interest rates and shift AD.
   • Increase money supply to decrease interest rates, increasing investment and consumption.
   • Tools:
     • Lower Reserve Requirement
     • Lower Discount Rate
     • Open Market Operations (e.g., buying bonds to increase money supply)

Addressing Inflationary Gap

Options

1. No Policy:
   • Wait for self-correction.
   • Wages and resource prices rise, increasing costs for firms.
   • AS shifts left, returning to full employment.
2. Fiscal Policy:
   • Decrease government spending or increase taxes.
   • Higher taxes decrease disposable income and consumer spending, decreasing AD.
3. Monetary Policy:
   • Increase Reserve Requirement
   • Increase Discount Rate
   • Sell Bonds
   • These actions decrease the money supply, increase interest rates, and decrease investment, thus slowing the economy.

Conclusion

• Understand how each policy affects the economy and the economic graph.
• Consider the implications of each policy action on both AD and AS.
• Recommended further learning: Other videos and review apps provided by Mr. Clifford.