Presentation on theme: "Fiscal Policy Review - The Payroll Tax Cut FH0 FH0 What does it pay for?"— Presentation transcript:
Fiscal Policy Review - The Payroll Tax Cut http://www.youtube.com/watch?v=yB1DdBP3 FH0 http://www.youtube.com/watch?v=yB1DdBP3 FH0 What does it pay for? How much do American’s pay? How much do they pay after the cut? What is the cap? What type of fiscal policy? – Expansionary or contractionary? – Automatic/mandatory or discretionary? What is a potential negative consequence?
Class Auction Want to buy this piece of candy? What are you willing to trade for it? What is required for this trade (barter) to work? What is the solution for this “double coincidence of wants?”
Review 1.What causes inflation? 2.Who is inflation bad for? Who can inflation help? 3.What is our definition of interest rates? 4.What stage of the business cycle is most commonly associated with inflation? 5.What stage of the business cycle is most commonly associated with unemployment?
What is the name of the bank that manages the U.S. money supply? In Plain English Activity
How is money created? http://www.youtube.com/watch?v=3HdmA3v PbSU http://www.youtube.com/watch?v=3HdmA3v PbSU
Activity Create a brochure for the Fed. Be sure to include the following: – State the purpose of the Fed and what it is. – How the Fed is structured. – What are its regulatory responsibilities? – What are the three tools of monetary policy?
The FED Privately Owned- banks buy stock in the Fed like a corporation Board of Governors- 7 member board appointed by the Fed. Set policies for the Fed Federal Reserve District Banks- Nation is divided into 12 districts. Each district bank runs a district and has a president and board of directors
What is monetary policy? Actions by the Federal Reserve System to expand or contract the money supply in order to influence the macro-economy What happens if they over expand the money supply?
The Federal Reserve System The Federal Reserve (Fed) serves as the nation’s central bank – created 1913. – oversee the banking system. – regulates the money supply (monetary policy). – lender of last resort.
Monetary policy Easy Money policies (expansionary) – increase the money supply and cause economic growth Tight Money policies (contractionary) - decrease the money supply and slow down the economy.
But first… what is a bond? http://www.youtube.com/watch?v=5Xzl- Ej2vHQ http://www.youtube.com/watch?v=5Xzl- Ej2vHQ Bond – like an IOU Interest – payment for the use of borrowed money Maturity – when the borrowed money needs to be repaid
What do high interest rates mean for the economy? Low?
*******FOMC****** To increase the money supply, the Fed buys government bonds (securities) from the public. To decrease the money supply, the Fed sells government bonds to the public. What does an increase in the money supply do to the interest rates and price levels? Decrease?
Review Scenario – high unemployment and low growth 1.Action by FED – easy or tight? Why? 2.OMO – Buy or sell bonds? Why? 3.What happens to money supply? Why? 4.What happens to interest rates? Why? 5.What happens to investment? Why? 6.What happens to aggregate demand? Why?
Reserve Requirement Reserves are deposits that banks have received but have not loaned out. The reserve requirement is the fraction of deposits that banks must hold as reserves (set by the FED).
How is money created out of thin air? http://www.youtube.com/watch?v=AgKFLk9xffA http://www.youtube.com/watch?v=AgKFLk9xffA
The Fed and the Reserve Requirement What does changing the reserve requirement from 10% to 20% do the money supply? Interest rates? What does decreasing the reserve requirement do to the money supply? Interest rates?
The Discount Rate (no longer used) The discount rate is the interest rate the Fed charges banks for loans. – Increasing the discount rate decreases the money supply. – Decreasing the discount rate increases the money supply.
What are some potential problems with controlling the money supply? The Fed’s control of the money supply is not precise. The Fed must wrestle with two problems that arise due to fractional-reserve banking. – The Fed does not control the amount of money that households choose to hold as deposits in banks. – The Fed does not control the amount of money that bankers choose to lend.
RR _____ DR _____ OMO – Buy or Sell MS _____ Excess Reserves _____ Interest rate _____ I_____ AD ______ Monetary policy in action Easy/Expansionary Policy Tight/Contractionary Policy RR _____ DR _____ OMO – Buy or Sell MS _____ Excess Reserves _____ Interest rate_____ I_____ AD ______
↓ RR= Banks can loan more $ Fed Buys OMO’s = bank have more $ fewer bonds ↓Discount Rate= Fed lowers cost of borrowing ↑RR = Banks have less $ to loan out. Fed Sells OMO’s = banks have less $ and more Bonds ↑Discount Rate = Fed lowers cost of borrowing Monetary policy in action Easy Money Tight Money