1. Fiscal Policy
Chapter 15

2. Fiscal Who? Fisc- latin for bag or basket
Fiscal 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

4. 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)

5. 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

9. 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

10. 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

12. Taxes
Gov’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

13. Realities of Fiscal Policy
Fiscal 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

15. Federal Reserve & Monetary Policy
Chapter 16

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 supply
Stabilizer of economy
Printer of money

17. 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 terms
Appt by the President, serve 1 term
Chair of the Board of Governors – appt by Pres, approved by the Senate – serves a 4 yr term, renewable

18. FED Structure

19. 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

20. 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

21. What is the FED? Banker for the government Banker for member banks
Regulator of banking industry
Tracker/ monitor of money supply
Stabilizer of economy
Printer of money
Overseer mergers
Ben Bernanke
Federal Reserve

22. Baum’s Wonderful World
Dorothy: crusading Populist
William Jennings Bryan
The Wiz: Central Banker
“The Fed”
Emerald City: D.C.
OZ: abbreviation for ounces
Silver “ruby” slippers: bimetallism
Yellow Brick Road: Gold Standard
Lion: cowardly Populist party
Tin Man: Industrial Workers
Scarecrow: Poor farmers
Tornado: Panic of 1893

23. Federal Reserve: the banker’s bank
Banker for the U.S. gov’t
Sells, buys, transfers, currency
Issues currency and coins
Check clearing – (p421)
Supervises bank lending
Discount rate – rate the Fed charges for loans to commercial banks

25. Functions of the Fed Fed monitors the reserves (cash) that banks keep
Enforce truth-in-lending laws
Oversee 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
“taking away the punch bowl just when the party gets started” ~William McChesney Martin

26. Factors Affecting Demand
What affects the demand for cash?
Cash on hand
Interest Rates
Price levels
General level of income
Treasury Department

27. *RRR* Monetary Policy Tools
Money creation – putting dollars into circulation
You 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.

28. How Money is Created Acme bank has $10,000, RRR of 10%
Thus, it holds $1,000 in reserves and loans the 0ther $9,000
A 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)

29. 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

30. Reserves Money 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

32. 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 down
RR down, money supply up

33. Discount Rate
Discount 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

34. 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 circulation

36. Money Policy Tight money policy Easy 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