So now it's time to bring it all together ... we have measured the economy (GDP), identified the 2 economic problems (unemployment and inflation), measured those problems, see the impact of spending, taxes, and interest rates on the economy (Loanable Funds, Money Market, MPC/MPS, Tax and Spending Multipliers), and we have seen how all that can impact GPD/PL (AS/AD Graph and Phillips Curve). Now we just need to figure out who can do what, and give it a name.
If Congress (namely the House of Representatives - some AP Gov for you) decides it wants to help fix a problem - unemployment, i.e. recession, or inflation, it will use what is known as FISCAL POLICY. It will either change it's spending levels or tax levels to adjust the economy (mainly AD) to move the economy back to equilibrium. Let's let Crash Course explain ...
Now, sometimes Congress doesn't want to act or won't act. Have no fear, the economy has another option, one you already know, the Federal Reserve. The Federal Reserve will use its influence on interest rates (MONEY MARKET GRAPH) to influence the economy through what is known as MONETARY POLICY. Again Crash Course will take it from here ...
Now that's not to say that there are no side-effects from either policy option, or that these policy options always work. We will dive more into that tomorrow in class.
One more visit from Crash Course on one side-effect of Fiscal Policy - debt and deficits. Enjoy.
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