Stabilizing the Economy Economic stability A situation in which there is economic growth, rising national income, high unemployment, and steadiness in the general level of prices Inflation A rise in the general price levels of an economy Recession A short-term decline in the economy that occurs as investment sags, production falls off, and unemployment increases

Monetary Policy: Controlling the Money Supply A form of government regulation in which the nation’s money supply and interest rates are controlled Money A system of exchange for goods and services that includes currency, coins and bank deposits Federal Reserve: Board of Governors A seven-member board that sets member banks’ reserve requirements, controls the discount rate, and makes other economic decisions

Monetary Policy: Controlling the Money Supply Reserve requirements Governmental requirements that a portion of member banks’ deposits must be retained to back loans made Discount rate The rate of interest at which member banks can borrow money from their regional Federal Reserve Bank Open Market Operations The buying and selling of government securities by the Federal Reserve Bank in the securities market

The FRB and the Executive and Legislative Branches President shares responsibility for fiscal policy with Congress Congress authorizes the FRB to make monetary policy But there are many formal and informal contacts between the White House and the FRB

Fiscal Policy: Taxing and Spending Federal government policies on taxes, spending, and debt management Intended to promote the nation’s macroeconomic goals, particularly with respect to employment, price stability, and growth Keynesian theory Discretionary fiscal policy: deliberate decisions by the president and Congress to run budget surpluses or deficits John F. Kennedy first to apply fiscal policy theory Revenue Act of 1964 Reduced personal and corporate income tax rates Tax cuts to stimulate the economy Reagan in 1981 and G.W. Bush in 2001 and 2003

The Effects of Globalization International economy Increased competition benefits consumers Expands the market for American products Labor unions are strongest critics of free trade Stress need to restrict “dumping” Fair trade rather than free trade Analysis suggests that globalization further segments the market into winners and losers. Losers tend to be smaller businesses and workers.

The Budgetary Process Federal government raises money from: Individual income taxes Social insurance Retirement receipts Corporate income taxes make up less than 10 percent of receipts Most government spending goes toward: National defense Human resources

Congress and the Budgetary Process Budget and Accounting Act of 1921 Gave the president authority to prepare an annual budget and submit it to Congress Staff agency now called the Office of Management and Budget was created to assist the president in this process President sends budget proposal to Congress in January or February of each year Congress and the appropriations committees actually provide the funding needed to carry out programs. Budget and Impoundment Control Act of 1974

Major Budget Conflicts Conflict between Democrats in Congress who favored more domestic spending and less military spending versus President Reagan’s administration who favored less domestic spending and more spending on defense 1990s Gingrich and the Republican Congress clashed with Clinton over which programs to cut in order to balance the budget.

Budget Initiatives of the G.W. Bush Administration Economic Growth and Tax Relief Reconciliation Act of 2001 Lowered income tax rates Expanded deductions Rebates 2003 economy stagnant; another round of tax cuts Cost of war Budget deficit

The Budget Deficit and the Debt Federal budget deficit The amount by which federal expenditures exceed federal revenues Gross domestic product (GDP) The total market value of all goods and services produced in a country during a year Deficit reduction legislation Gramm-Rudman-Hollings Act of 1985 Budget Enforcement Act of 1990 Budget surplus 1998 Budget deficit by 2003