Post on 18-Dec-2015
CHAPTER 15
Fiscal Policy
Fiscal Who?Fisc- latin for bag or basketFiscal Policy – use of gov’t
spending and revenue collection (taxing) to influence the economy.
Gov’t spends nearly $250m every hour
Used to achieve: Economic growth Full employment Price stability
Federal Budget
Federal Budget – written document showing money expected to come in and where it will be spent.
Plan to pay the government’s expenditures for a year.
Fiscal Year – 12 month period of a budget (usually OCT 1-SEPT 30)
http://www.youtube.com/watch?v=_mfMG66LtVU&feature=related
Process of the Budget
President gained an upper hand in creating the federal budget in 1921 when the Office of Management and Budget (OMB) was created to formulate the budget
Congress clawed back some power in 1974 creating the Congressional Budget Office (CBO) as a non-partisan scorekeeper
Fiscal year starts on October 1 and proposed budget must be submitted no later than 1st Monday in February
When a President’s approval rating is high, or his party controls Congress, he is more likely to get more of his spending approved
http://www.kowaldesign.com/cgi/Budget.pl?estimates=111111
Fiscal Policy: Grow
Expansionary policies – attempt to increase demand and output Encourage growth by either increasing government spending and/or cutting taxes. Govt spending increases aggregate demand to higher prices,
higher supply hire more workers
http://www.youtube.com/watch?v=1qhJPqyJRo8&feature=related
Fiscal Policy: Slow
Contractionary Policies – decrease
output and demand to slow growth To prevent demand from exceeding supply Prevents inflation Govt spends less, slows down GPD
lower prices
TaxesGov’t can also use
taxes to influence economic growth and stability
Decrease (cut) in taxes puts more money in hands of business and consumers, encouraging them to spend and invest
Increase (raise) in taxes takes money from consumers and businesses encouraging them to spend and invest less
Realities of Fiscal PolicyFiscal policy is very
theoretical and can be clumsy and difficult at times Changes in spending usually take
a year to materialize Congress and president are
elected officials who want to create policies beneficial to those who vote for them
Different levels of gov’t have to work together to coordinate policy from national, state and local levels
Federal Reserve & Monetary Policy
Chapter 16
Monetary Policy
Named for the “minting of coins” and drawn from the Roman Goddess Moneta 200 years before the common era
Central government and commercial bank Regulator of banking industry
Monitors money supplyStabilizer of economyPrinter of money
Structure of the FED
Monetary Policy – actions the FED takes to influence the level of GDP and inflations
Board of Governors – oversees the Federal Reserve
7 members with staggered 14 yr termsAppt by the President, serve 1 termChair of the Board of Governors – appt
by Pres, approved by the Senate – serves a 4 yr term, renewable
FED Structure
Twelve District Banks
12 districts and central district banks 25 branches
Monitor and report economic and banking conditions
Member banks – national banks must join the FED
FAC – Federal Advisory Council – collect info and reports to the Board
1 member from each district
Federal Open Market Committee
Makes key decisions about interest rates
Decisions are announced to the public
Members come from the Board of Governors + 5 district bank Presidents
http://www.youtube.com/user/mjmfoodie#p/u/13/aMg3vrQ6keE
What is the FED?
Banker for the governmentBanker for member banksRegulator of banking industryTracker/ monitor of money
supplyStabilizer of economyPrinter of moneyOverseer mergers
Federal Reserve
Ben Bernanke
Baum’s Wonderful World
Dorothy: crusading Populist William Jennings Bryan
The Wiz: Central Banker “The Fed”
Emerald City: D.C.OZ: abbreviation for ouncesSilver “ruby” slippers: bimetallismYellow Brick Road: Gold StandardLion: cowardly Populist partyTin Man: Industrial WorkersScarecrow: Poor farmersTornado: Panic of 1893
Federal Reserve: the banker’s
bank
Banker for the U.S. gov’tSells, buys, transfers, currencyIssues currency and coinsCheck clearing – (p421)Supervises bank lendingDiscount rate – rate the Fed
charges for loans to commercial banks
Functions of the Fed
Fed monitors the reserves (cash) that banks keep
Enforce truth-in-lending lawsOversee bank-to-bank lending
Interest rates banks charge other banks is the federal funds rate
Reports on conditions of banks and their net worth or their investments
http://www.clevelandfed.org/About_Us/who_we_are/about_the_system/index.cfm http://www.pbs.org/wgbh/pages/frontline/meltdown/view/?utm_campaign=viewpage
&utm_medium=grid&utm_source=grid
“taking away the punch bowl just when the party gets started” ~William McChesney Martin
Factors Affecting Demand
What affects the demand for cash?
1. Cash on hand2. Interest Rates3. Price levels4. General level of
incomeTreasury Department
Monetary Policy Tools
*RRR*Money creation – putting
dollars into circulationYou take out a loan and put it
into a checking acct.Bank has to only keep a
certain amount (required reserve ratio) of your money on hand.
Bank lends out the remaining money.
How Money is Created
Acme bank has $10,000, RRR of 10% Thus, it holds $1,000 in reserves and loans the 0ther
$9,000A new deposit of $1,000 arrives
No change in the money supply Yet now bank holds $900 in excess of RRR (which is
$1,100)
Money Creation
Acme Bank will loan out this excess of $900 by just crediting another customer’s account
Thus there is $900 dollars of new money, not actually existing in supply (physically), but available to someone
ReservesMoney Multiplier
formula – 1/ RRR
Tells how much the money supply will increase after an initial cash deposit to the banking system
Everything in excess of required reserves is theoretically loaned out, thus creating new money
Reserve Requirements
Reducing the RR frees up money in local banks allowing them to make more loans
Increasing the RR tightens up the money supply because banks have less money to lend out.
RR up, money supply downRR down, money supply up
Discount RateDiscount rate – interest FED
charges on loans to financial institutions
Changes in the discount rate affect the prime rate (rate of interest banks charge their best customers)
Discount rate down – more money lent out, increased money supply
Discount rate up – less money lent out, decreased money supply
Open Market Operations
Most important tool used by the FED
Involves bond sales
Decrease the money supply – sells govt securities to dealers to take money out of circulation
Increase the money supply by buying gov’t securities to put money into circulationhttp://www.youtube.com/watch?v=L0hQfaxYU8k
Money Policy
Tight money policy Fed wants to reduce the money
supply, raise interest rates, spending slows down
Easy money policy Fed wants to expand or stimulate the
economy – increase money supply
http://www.frbsf.org/education/activities/chairman/index.html