Monetary Policy

• Monetary Policy – the process by which the government controls the supply of money in circulation and the supply of credit through the actions of the Fed (Federal Reserve Board)

• Actions of the Fed• Increase $$ in circulation by lowering interest rates

(inflates economy – higher prices and wages)• Stabilizing $$ in economy by raising interest rates

(deflates economy – stable or lower prices or wages)

Monetary Policy

The Fed can implement monetary policy by 3 ways:

1. Manipulating the reserve requirement – raises or lowers the amount of money banks are required to keep on hand

2. Manipulating the discount rate – raises or lowers the interest banks pay the Federal Reserve Banks for borrowing money (higher the rate the less consumers purchase)

3. Manipulating open market operations – Federal Reserve buys and sells U.S. government bonds

Monetary Policy

In the 1990s, U.S. expanded without tax cuts and created jobs with little inflation – credit is given to Alan Greenspan the the Fed

Reminder: Fiscal Policy involves BUDGET and Monetary Policy involves MONEY SUPPLY

Tools of Economic Policy Making

• President receives advice on the state of the economy from:• Council of Economic Advisors• National Economic Council• The Office of Management and Budget• The Secretary of Treasury

Fiscal Policy Making

• Office of Management and Budget: responsible for initiating the budget process. • The president tells the director what his policy

initiatives are• Discuss government’s predicted income or revenue• OMB writes the budget proposal for president and

sends to Congress

Fiscal Policy Making

• Congress splits the proposal to three committees:• House Ways and Means Committee – deals with the

taxing• Authorization Committees – Senate and House of

Reps decides what Congress wants to fund• Appropriations committees – Senate and House of

Reps decides how much money to spend on the programs authorized

Fiscal Policy Making

• Budget problems lead to – Budget Reform Act of 1974• Congressional Budget Office was created – Budget

committees from the House and Senate • CBO conducts meetings to talk about the gov’ts

revenue and spending levels and negotiates compromises between Congress and White House

• If no compromises by end of the fiscal year then government shuts down (stop-gap bills are passed)

Budget Enforcement Act 1990

• Law categorizes government expenditures as either mandatory or discretionary spending• Mandatory – required by law to fund programs such

as entitlement programs, Social Security, Medicare, veterans’ pensions, and payment on national debt

• Discretionary – not required such as defense, education, highways, research grants, and all government operations

Domestic Policy

• Liberals believe government has an obligation to provide for social welfare to help the needy

• Conservatives believe social-welfare programs are encroachments on individual liberties and responsibilities

• Two kinds of social-welfare programs:• Social insurance – national insurance programs into

which employers and employees pay taxes (Social Security); it is earned

• Public assistance programs – government directly helps the needy without requiring anything in return; not earned; both liberals and conservatives force people to seek work or enter work-training programs

Social Security• Social security is entitlement program mandated by law;

Gov’t must pay benefits to all people who meet requirements; Changing law would require congressional action• Program has expanded to 4 categories of persons

• Retired workers and their survivors who are at 65 or older

• Insurance for the disabled – includes learning disabled and those dependent on drugs/alcohol

• Medicare – people over 65 get healthcare• Medicaid – provides medical and health related

services for low income parents, children, seniors, and people with disabilities

• Temporary unemployment – those out of work

Social Welfare

• Aid to Families with Dependent Children (AFDC) – largest federal welfare program• Public assistance programs, known as welfare, target

families whose total income falls become the minimum amount needed to provide for a family of 4 ($17000)

• Larger family = more money• Critics argue it encourages families to have more

children

Social Welfare

• Supplemental public assistance programs (SSI) – helps the disabled and the aged who are living at or near the poverty level

• Food stamps – to help improve diet; people use debit cards to pay

Welfare Reform Act of 1996

• Under the new law, social-welfare funds are funded by both state and federal governments with fed gov’t giving block grants• Abolished the AFDC and established the Temporary

Assistance for Needy Families (TANF)• Requiring adults to find work within two years or be

cut off• Placing a lifetime limit of 5 years for welfare eligibility

(waivers available to those seeking work)• Prohibiting illegal immigrants from receiving

assistance

Health Care

• Americans spend more than 17% of the nation’s GDP (the total of goods and services produced in a year) on healthcare

• U.S. has the most expensive healthcare system in the world and only fully industrialized nation without a national health care program

• People pay about $5000 per year for insurance and rising faster than cost of living (in 2010 15.4% of population was without health insurance)

Health Care

• Americans spend more than 17% of the nation’s GDP (the total of goods and services produced in a year) on healthcare

• U.S. has the most expensive healthcare system in the world and only fully industrialized nation without a national health care program

• People pay about $5000 per year for insurance and rising faster than cost of living (in 2010 15.4% of population was without health insurance)

Health Care

• Voters want increased coverage but no evidence to show who will pay for it

• No consensus on who should pay for insurance (government or private)

• Current health care bill will be reviewed by the Supreme Court