Economic Systems in the United States SOL GOVT.14 The student will demonstrate knowledge of economic systems SOL GOVT.15 The student will demonstrate knowledge of the United States market economy. SOL GOVT. 16 The student will demonstrate knowledge of the role of government in Virginia and United States economies

Influence of Government Policies on the Economy Government policies and regulations may speed up or slow down economic activity in the U.S. Market Economy

How the U.S. Government Influences Economic Activity Two major methods for implementing Macroeconomic Policy (branch of economics which deals with the performance, structure, behavior and decision-making of the whole economy) *Fiscal Policy *Monetary Policy

Fiscal Policy Two main “instruments”: Changes in government expenditures (changes in the amount of $$ government spends) The level and type of taxation it imposes

Monetary Policy The control of the nation’s money supply and set interest rates to promote economic growth and stability

Role of the Federal Reserve System The central banking system of the United States since 1913 which oversees monetary policy Two key objectives, known as the “Dual Mandate”: 1. Stable prices (low inflation rate) 2. Maximum employment (low unemployment rate)

Banking System Foundation Fractional-Reserve Banking: banks only required to hold a fraction of their depositors money in reserve *Banks invest the majority of their customers money-when too many depositors withdrew their money at same time a bank run can result *The Fed is the lender of last resort to bail them out, but can lead to moral hazard as risk is shifted to the Fed  Rationale: resources that sit idle in some vault really aren't of much value to the community and that if you can put those resources to work for productive investment, you can make a profit and the community is enriched in the process. With a 10% reserve requirement: deposit of $1000; bank can loan out $900 to someone else, who can make a payment to a 3rd party, who then deposits the $900 in the bank who then can loan out $810 to another! And so on…

What does the FED do? Supervise banks through rules/regulations Provide financial services to banks Control the money supply

Structure of the Fed Federal Reserve Board of Governors Chaired by Janet Yellen for a 12 year term Fed does not need most of its decisions approved by President or Congress- they are independent Fed Chair Janet Yellen

Tools for Monetary Policy Discount Rate: interest rate charged to commercial banks on loans they receive from the Fed Reserve Requirement: amount of money a bank is required to hold in reserve against deposits to avoid bank runs/panics Open Market Operations (OMO): buying or selling government bonds to control the interest rate and supply of money in the economy (now buying $85 BILLION a month…)

Federal Open Market Committee (FOMC) Responsible for setting U.S. monetary policy and interest rates *Consists of all 7 Fed Governors, and 12 regional Bank presidents *Meets 8 times a year to set rates Very powerful committee!

Structure of the Fed 12 Regional Federal Reserve Banks located in 12 Federal Reserve Districts 12 Regional Federal Reserve Banks located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco

Bureau of Engraving and Printing 1861: The first general circulation of paper money (Greenbacks) by the federal government occurs due to the financial demands of the Civil War. 1865: The Secret Service is established as a bureau of the Treasury for the purpose of deterring counterfeiters. 1934: $100,000 bill issued (largest denomination ever) 1957: In God We Trust added to $1 bills (1864 on 2 cent coin) 1969: The Treasury Secretary announces that currency in denominations larger than $100 will no longer be issued $500, $1,000, $5,000, and $10,000 were discontinued immediately

Bureau of Engraving and Printing BEP prints about 25 million notes per day with a face value of $560 million! 7.1 billion notes will be printed in 2017, costing 10 cents per note (2.4B $1, 915M $5; $1.5B $100) 90% to replace old notes taken out of circulation 8.9 tons of ink used each day in Washington DC and Fort Worth, Texas facilities

Elastic Currency The fact that the Fed can manipulate the supply of money in the economy Expansionary (print more money) to combat unemployment in a recession, by lowering interest rates to entice businesses to expand Contractionary reduce the money supply to slow inflation

The Fed trades in “fungible securities” Fungibility Property of a good or commodity whereby it is capable of mutual substitution A $50 bill is – a car isn’t (but the gas in it is!) The Fed trades in “fungible securities”