Sponge Quiz #1: In Year 1, the cost of a market basket of goods was $720. In Year 2, the cost of the same basket was $780. What was the consumer price index for Year 2? #2: In one year, the federal government takes in $100 billion in taxes and spends $99 billion. Is this a budget deficit or budget surplus? #3: A nation has 700,000 people who have jobs, 25,000 people looking for jobs, and 50,000 unemployed people no longer looking for jobs. What is this nation’s unemployment rate?

Monetary policy and FISCAL POLICY SSEMA2: The student will explain the role and functions of the Federal Reserve System SSEMA3: The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth.

Functions of Money Medium of exchange (means of payment) Store of value (you can save the money and spend it later) Unit of measurement (provides a consistent way of quoting prices)

What is Monetary Policy? The plan of government to regulate the amount of money available in the economy

What is the Fed? The Federal Reserve System is the federal government’s bank (tax revenues are deposited, and govt. expenses are withdrawn from the System)

Organization of the Federal Reserve System

How is the Fed organized?

Board of Governors 7 governors appointed by President to serve 14-year terms One of the governors is appointed by the Pres. to serve as Board Chair

Federal Open Market Committee Makes decisions about monetary policy Consists of Board of Governors, president of New York Federal Reserve Bank, and 4 of the presidents of the 11 other district banks

12 banks in different regions; responsible for printing paper currency District Banks 12 banks in different regions; responsible for printing paper currency

Specific Functions of the Fed #1: Control money supply #2: Supply paper money (Federal Reserve Notes) #3: Hold bank reserves

#4: Provide check-clearing services #5: Supervise member banks - sets reserve limits #6: Serve as “lenders of last resort”

Tools for Changing the Money Supply changing the required reserve limit (% that banks must keep on hand as cash balances) changing the discount rate (interest rate the Fed charges other banks to borrow money) engaging in open market operations (buying and selling bonds)

Monetary Policy During a Recession During a recession, the Fed will BUY bonds and securities itself, which increases the money supply When banks have more money to lend, they lower interest rates Consumers and businesses will borrow more money GDP increases, leading to economic growth

Monetary Policy During Expansion When the economy is growing too fast, the Fed will SELL bonds, which decreases the money supply When banks have less money to lend, banks raise interest rates because so many consumers are competing for the limited funds Fewer consumers and businesses can borrow money to buy goods and make investments Reduces GDP, slows economic growth, reduced the risk of inflation

FISCAL POLICY

What is Fiscal Policy? The decisions govt. makes about taxing and spending in order to promote economic growth and stability

Expansionary Fiscal Policy Goal: Stimulate aggregate demand during a recession Solution: Govt. may reduce income taxes or increase govt. spending As a result: Consumers and businesses spend more Increased spending raises GDP and might prevent recession and unemployment

Contractionary/Restrictive Fiscal Policy Goal: Restrict aggregate demand during an expansion (reduce inflation) Solution: Govt. may increase income taxes or decrease govt. spending As a result: Consumers and businesses have less money to spend Decreased spending lowers GDP and might prevent inflation