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2-6 Economics — A Primer [CH 2

produce the product with the same quality much less expensively. An example is with
the steel industry being moved to Japan and then China.

Little can be done about frictional and seasonal unemployment. Various economic
policy tools can be engaged to combat cyclical unemployment, as monetary and fiscal
policies. However, structural unemployment is an important concern when considering
global competition.

Monetary and Fiscal Policy
The government can use monetary or fiscal policy, or both, to limit inflation,
counteract deflation and combat unemployment. All three have a significant impact on
monetary policy
Governmental policies and business. Monetary policy refers to government policy that controls the size of the
actions concerning nation's money supply. An expansionary monetary policy puts more money into
regulation of the nation's circulation which is an inflationary policy. Business borrowing becomes easier and
money supply. often less expensive with lower interest rates which is the cost of borrowed money; as

businesses expand, unemployment is reduced. By contrast, restrictive monetary policy
tightens the money supply and helps limit inflation. A restrictive monetary policy
would be to force lenders to increase their interest rates charged to borrowers on their
loans, or in the discount rate that banks pay the federal reserve for the dollars the bank

borrows fro the Federal Reserve. An increased discount translate to a higher interest
rate borrowers will pay on the loans that they take.
fiscal policy Fiscal policy deals with government revenues and expenditures and how a
government revenues and government affects the supply of money in an economy. Increased government
expenditures and how a
government affects the spending can be used to increase economic activity and reduce unemployment. This is
supply of money in an a limited action because government is not an entrepreneurial wealth creating activity
economy. as private industry is. Government raises revenues through taxation and taxation pulls
money out of circulation. Limiting government spending can control inflation.

Expanding and contracting the supply of money in an economy will also affect
inflation.
Interest paid. Interest on The national money supply is the amount of money available for consumers to
borrowed money is the spend in the economy. In the United States, the circulation of money is managed by the
cost of using the money.
Federal Reserve Bank. An increase in money supply causes interest rates to drop and
makes more money available for customers to borrow from banks.
The Federal Reserve mechanically increases the money supply by buying
government-backed securities (bonds, which reflect government borrowing), and

effectively puts more money into banking institutions. When banks have more money
to loan, they reduce the interest rates consumers pay for loans, which typically
increases consumer spending because money is easier to borrow. Should the economy
begin to slow, the Federal Reserve will increase the money supply to spur additional

spending by consumers and build confidence in the economy.
An increase in paper money reduces the value of the U.S. dollar, but increases the
money banks can lend to consumers.
An increase in money supply can also have negative effects on the economy even

though there is more money that banks can lend to consumers. Increasing the money
supply causes the value of the dollar to decrease, and this is realized with an increase
in prices consumers pay for their goods and serves – when the dollars’ value is
decreased it takes more dollars for consumers to purchase the same goods. For

example, the effect in an economy can be observed with automobile purchase prices
rising, the costs of real estate and building materials increase making homes more
expensive. This can ripple out and affect other nations. To balance the increased costs
and make it easier for customers to get loans for their purchases, banks lower the

interest rates they charge and their requirements to make a loan. It is easy to perceive
the circularness of a monetary policy.

Microeconomics
Microeconomics deals with the economic activities of an individual or individual
firm and limitedly with individual industries. People entering a market to purchase
goods and services are the determinants for their price and the quantity purchased. This
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