hey how you doing econ students this is Mr Clifford welcome to ACDC econ let's review fiscal and monetary policy macroeconomics was created for only two reasons to measure the overall economy and to fix it if there's a problem when it comes to measuring the economy there's only three possible things that could be happening at any given period of time the economy can be in a recession it can be at full employment or it can have an inflationary Gap now let's analyze how to fix the problem let's start with a recession if there is a recession
we have only three different options we can use we can do no policy at all which is just to wait it out we can use fiscal policy or we can use monetary policy what you need to know is how do these things affect the overall economy and what happens on the graph for example if we take no policy action at all in a recession what's going to happen to aggregate supply well since we have high on employment eventually wages are going to go down and resource prices will go down which means costs will go down
and aggate Supply will shift to the right this will put us back at full employment so remember the economy is self-correcting over time so if we do nothing eventually will go back to full employment the long run aggregate supply now what about fiscal policy there are only two tools in the toolbox of fiscal policy they are government spending and Taxation so if there's a recession what do we do to government spending or what could we do to taxes in order to stimulate the economy and get us out of the recession well we can increase government
spending or we can cut taxes but wait taxes aren't a shifter of aggregate demand well lowering taxes would increase consumer spending which would shift aggregate demand to the right the third option we can use is monetary policy this is controlling the money supply to affect interest rates and shift aggate demand so when we're in a recession we want to increase the money supply this will decrease interest rates and increase investment in consumption that'll increase Agate demand and close a recessionary gap but what causes an increase in the money supply I know that we need to
increase money supply but how do we do it well there's three tools in the toolbox of monetary policy they are the reserve requirement the discount rate and open market operations so what could the FED do to each one of these things to get us out of a recession well they can lower the reserve requirement which means Banks can create more money they can lower the discount rate which means they can loan out more money to Banks or they can buy bonds when the FED buys bonds it puts money in the system increase in money supply
so for the bottom two aggate demand is increasing we're speeding up the economy using some sort of government intervention and top one we're just waiting it out and letting Agate Supply increase putting us back in Full Employment now if you understand all that it's the same thing over again except for an inflationary Gap so when we have inflation we have only three different options we can do no policy we can use fiscal policy or we can use monetary policy it's your job to know how each one of these situations will affect the graph and the
process by which the economy changes so pause this video and make sure that you know exactly what's going to happen in each one of these three scenarios if we wait it out eventually when we have inflation wages will go up and resource prices will go up so costs go up to firms aggregate supply will shift to the left and put us back at full employment for fiscal policy we can either decrease government spending or we can increase taxes increasing taxes would decrease disposable income and decrease consumer spending and therefore decrease Agri demand again remember fiscal
policy affects aggregate demand whereas waiting it out and doing no policy action will affect aggregate supply and for monetary policy the central bank can either increase the reserve requirement increase the discount rate or it can sell bonds each of these scenarios would decrease the money supply which would increase interest rates that would decrease investment and decrease Agri demand slowing down the economy all right that's it make sure to check out my other videos and my review app until next time
