M ONETARY AND F ISCAL P OLICY

F EDERAL R ESERVE S YSTEM Run by board of governors – serve 14 year terms Chair – serves a 4 year term 12 Federal Reserve districts Can set reserve requirements and give discount rates Can control the money supply to counteract inflation or a recession. How?

T AXING AND S PENDING Fiscal Policy is the use of national govt.’s taxing and spending to influence the operation of the economy and maintain economic stability Discretionary fiscal policy – deliberate decisions by the President or Congress to run budget surpluses or deficits How can the Pres. and Congress influence the economy? Revenue Act of 1964 – Kennedy reduced taxes to help stimulate the economy Bush and Reagan attempted to repeat this success

B UDGET D EFICIT AND THE D EBT What has led to our debt? Tax cuts Defense spending Gross expansion of Social Security, Medicaid and Medicare View the deficit as a percentage of the Gross Domestic Product GDP – total market value of all goods and services produced in a country during the year 1980s – 3-5% 2006 – 3.2% Over the years, deficit reduction legislation has been proposed and passed but not on consistent basis Keynesian economics justifies more spending in times of economic recession

1980 S - R EAGAN Tax and budget cuts led to huge deficit Gramm-Rudman Act – had to agree to declining deficit number, if not – cuts “across the board” in discretionary spending Why did some members of Congress not like this? 1986 – Tax Reform Act of 1986 Dropped number of tax brackets from 15-3 By 1988, $1 trillion had tripled to $3 trillion

B USH S R. “Read my lips, no new taxes” Recession in early 1990, had to tax To avoid the across the board cuts, Bush: Created new top 31% tax bracket for upper class Increased the federal tax on gasoline Cut defense spending Budget Enforcement Act – created the “pay as you go” system. What is this?

C LINTON New 39% tax bracket Increase in federal gasoline tax Cutback in Medicare spending Balanced Budget Act Limited govt. spending “Phantom surplus”

BUSH $1.35 trillion in cuts over 10 years Top tax bracket from 39%-35% Gradual elimination of “death tax” Attempted to fix the marriage penalty