Role of Government and Federal Reserve Bank in our economy Bolanos

Opener: What are some things the government can do to stimulate the economy? -Strategies/actions to increase GDP or AD.

Biz Cycle Recap

Question Think of the answers from opener today. 1) What can the government do to get the economy out of a recession? 2) What can they do to slow the economy down? 3) Why would they want to slow the economy down?

Stabilization

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The Federal Reserve & Monetary Policy

The Federal Reserve Act of 1913 Created the Federal Reserve System… Usually referred to as “the Fed”. It is composed of 12 regional banks… Overseen by a board of governors… That lend money to private banks— “The Lender of Last Resort”. All private national banks are required to join the Federal Reserve System.

The Role of the Fed The Fed is the bank of the United States… It processes all government payments (social security, IRS refunds, etc.)… It also makes interest payments on government bonds… And is responsible for issuing currency.

Monetary Policy The actions the Federal Reserve (Central Bank) takes to influence the level of GDP and the rate of inflation in the economy.

How Do They Do It? Tools of the FED Open Market Operations Discount Rate (Fed to Banks) Federal Funds Rate (bank to bank) Reserve Requirements Open Market Operations Simulation

Cool off or Heat up If the Fed wants to cool of the economy, it wants to slow down growth (control inflation). It would start a “tight money” policy. Lessen the supply of money Sell bonds, increase interest rates, increase RRR If it wants to heat up the economy, it wants to stimulate growth. It will have a “loose money” policy. Increase supply of money. Buy bonds, lower interest rates, lower RRR

Fiscal and Monetary Policy Tools Fiscal policy tools Monetary policy tools 1. increasing government spending 2. cutting taxes Expansionary tools 1. open market operations: bond purchases 2. decreasing the discount rate 3. decreasing reserve requirements Contractionary tools 1. decreasing government spending 2. raising taxes 1. open market operations: bond sales 2. increasing the discount rate 3. increasing reserve requirements

Policies to Influence the U.S. Economy Monetary Policy Actions of the Federal Reserve Raise or Lower the Discount Rate Raise to Decrease Aggregate Demand and Fight Inflation Lower to Increase Aggregate Demand and Fight Recession Raise or Lower the Reserve Requirement Open Market Operations – Buy and Sell Govt. Bonds Sell Bonds to decrease $ supply to decrease Aggregate Demand Buy Bonds to increase $ supply to increase Aggregate Demand Fiscal Policy Actions of the Federal Government Raise or Lower Taxes Increase or Decrease Government Spending Increase to Increase Aggregate Demand and Fight Recession Decrease to Decrease Aggregate Demand and Fight Inflation

Monetary Policy Actions of the Federal Reserve Raise or Lower the Discount Rate Raise to Decrease Aggregate Demand and Fight Inflation Lower to Increase Aggregate Demand and Fight Recession Raise or Lower the Reserve Requirement Open Market Operations – Buy and Sell Govt. Bonds Sell Bonds to decrease $ supply to decrease Aggregate Demand Buy Bonds to increase $ supply to increase Aggregate Demand

Fiscal Policy Actions of the Federal Government Raise or Lower Taxes Raise to Decrease Aggregate Demand and Fight Inflation Lower to Increase Aggregate Demand and Fight Recession Increase or Decrease Government Spending Increase to Increase Aggregate Demand and Fight Recession Decrease to Decrease Aggregate Demand and Fight Inflation

How/When/Why If the economy needs a “boost” the Federal Reserve might: _______________ bonds. _______________ interest rates. _______________ reserve requirements.

How/When/Why If the economy needs to be “cooled off” the Federal Reserve might: _______________ bonds. _______________ interest rates. _______________ reserve requirements.

Fiscal Policy Actions taken by the Federal Government to influence the economy (business cycles).

How do they do it? Taxation (revenue) Spending (expenditures) -transfer payments Regulation

How/When/Why If the economy needs a “boost” the Federal Government might: _______________ taxes. ______________ spending.

How/When/Why If the economy needs to be “cooled off” the Federal Government might: _______________ taxes. _______________ spending. Demo Lesson - How Can Changes in the Federal Government’s Budget Stabilize the economy?

Understanding Fiscal Policy Fiscal policies are used to achieve economic growth, full employment, and price stability. Federal Budget- a plan for the federal government’s revenues and spending for the coming year Lists expected income Shows how much money will be spent

Fiscal Policy and the Economy Contractionary Policies- fiscal policies, like lower spending and higher taxes, that reduce economic growth Used when demand exceeds supply to slow the growth of the economy (GDP) Used to slow or prevent inflation Leads to a decrease in aggregate demand which leads to lower prices Opposite is Expansionary Policy

Question Under which situation would you think that more economic growth would occur? Massive tax breaks for the wealthy. They will take the money they save from taxes and spend like no tomorrow. They will also start businesses and invest more. Strong working class and middle class, have plenty of money from strong wage growth. They have stability in their jobs as well.

Case Studies – Fiscal Policy

Which one would look to expand the role of Government to benefit the citizens of the United States?

FDR – New Deal Expand Government Role in Economy

Hayek Keynes

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Broken Window Fallacy