Countercyclical Policies

Connections:  Countercyclical Fiscal Policies

International Markets

Reminder: 

Interest Rates are a domestic COST of borrowing and therefore high interest rates are BAD for Ig.

Interest Rates are an international DRAW for investors and therefore high interest rates are GOOD for currency inflows.

Fighting a Recession: Interest Rates Up due to Crowding Out	Fighting Inflation: Interest Rates Down (due to Crowding In—If it occurs)
D for the US Dollar will =	D for the US Dollar will =
The US Dollar will =	The US Dollar will =
US Exports will =	US Exports will =
Xn will therefore =	Xn will therefore =
The US Current Account Balance will decrease (more on this later).	The US Current Account Balance will increase (more on this later).

Connections: Countercyclical Monetary Policies

International Markets

Fighting a Recession: Interest Rates Down due to Fed Policies	Fighting Inflation: Interest Rates Up due to Fed Policies
D for the US Dollar will =	D for the US Dollar will =
The US Dollar will =	The US Dollar will =
US Exports will =	US Exports will =
Xn will therefore =	Xn will therefore =
The US Current Account Balance will increase (more on this later).	The US Current Account Balance will decrease (more on this later).

Domestic Countercyclical Policies

(Don’t say “Government”, say either Congress or the Fed)

Fighting a Recession:  Congressional Fiscal Policy

	What is the Change?
Congress can change Taxes:
or Congress can change Spending Programs:
The “C” component of AD should:
The “G” component of AD should:
Overall AD should:
(This should be graphed on the Aggregate Model)	----------
However, the Tax and Spending change will create a budget_____
In order to fund this, Congress must have bonds ____ to the public
On the Money Market Graph, Congressional actions will change this line on the graph:
The line will move:
This will cause nominal interest rates to:
This will affect Private Gross Investment:
The effect of Congress’s actions will also cause a change on the Loanable Funds Market.  First, the Supply line will move:
Also, Congress’s actions will cause the Demand line to move:	Outward (some texts)
Both of these events will affect the Real Interest Rate:
(This should be shown on the Investment Demand Graph)	----------

Fighting Inflation:  Congressional Fiscal Policy

Congress can change Taxes:
or Congress can change Spending Programs:
The “C” and “G” components of AD should:
Overall AD should:
(This should be graphed on the AD/AS Model)	----------
On the Money Market Graph, Congressional actions will change this line on the graph:
The line will move:
This will cause nominal interest rates to:
This will affect Private Gross Investment:
On the Loanable Funds Graph, the Supply line will move:
The Demand Line will also move:
Both of these events will affect the Real Interest Rate:

Fighting Recession:  The Federal Reserve Monetary Policy

	What is the Change?
The Fed will do this with the Bond Market:
On the Money Market Graph, this line will move:
It will move in this direction:
Therefore, Nominal Interest Rates will:
(This change can be shown on the Investment Demand Graph)	----------
This component of GDP will therefore change:
Therefore, AD will:
(This change can be shown on the Aggregate Demand Graph)	----------
The Fed can also do the following:	----------
Change the target rate for the Fed Fund Rate between banks:
Change the Discount Rate for banks borrowing from the Fed:
Change the Reserve Requirement within banks:
All of these will change loan availability to the public:

Fighting Inflation:  The Federal Reserve Monetary Policy

	What is the Change?
The Fed will do this with the Bond Market:
On the Money Market Graph, this line will move:
It will move in this direction:
Therefore, Nominal Interest Rates will:
(This change can be shown on the Investment Demand Graph)	----------
This component of GDP will therefore change:
Therefore, AD will:
(This change can be shown on the Aggregate Demand Graph)	----------
The Fed can also do the following:	----------
Change the target rate for the Fed Fund Rate between banks:
Change the Discount Rate for banks borrowing from the Fed:
Change the Reserve Requirement within banks:
All of these will change loan availability to the public: