American Government Unit Chapter 16: Financing Government IV. Fiscal and Monetary Policy

Objectives Describe the overall goals of the Federal Government’s actions in the economy. Explain the features and purposes of fiscal policy. Explain the features and purposes of monetary policy.

Overall Economic Goals Gross domestic product (GDP): the total value of all final goods and services produced in the country each year. Goals of the Federal Government in the economy – full employment, price stability, and economic growth Full employment – enough jobs for people who want them Price stability – stable long-term growth of the economy – small inflation or deflation Inflation – general increase in all prices Deflation – general decrease in all prices (can’t pay off loans) Recession – absence of growth and shrinking of the economy

Fiscal Policy Fiscal Policy – the governments powers to tax and spend to influence the economy. To grow economy – you need to put more money into the economy – deficit spend or lower taxes To dampen economy (Why?) – balance budgets and raise taxes Free enterprise says government shouldn’t do anything – Great Depression Keynesianism – says government deficit spend to stimulate economy – Bush (2008) and Obama (2009) Not real fast moving

Monetary Policy Monetary Policy – policy the FED can influence the economy by adjusting the amount of currency or money supply in the economy by the use of credit Federal Reserve System (1913) – the Fed – 7 members picked by president for 14 years works independently of Congress is the nations central bank. Created to stop Panics – when depositors lose confidence in banks and take out all money (bank run) Fed is a source of emergency funding for banks 3 tools

3 tools of the Fed Open market operations – the buying and selling of government bonds to banks If the Fed sells bonds – lessen or dampen the money supply, if they buy bonds back – economy grows Reserve Requirements – amount of money banks must have on hand (10%). If the Fed raises RR – economy is dampened, if Fed lowers RR – economy grows Discount Rate – interest rate banks must pay if they borrow money from the Fed. If DR is raised – economy is dampened (more expensive). If DR is lowered – economy grows (cheaper) Excel example?

Review What are the principal economic goals of the Federal Government? What methods are used by the government to meet these goals? Should the government be involved in the economy? Why or Why not? What are some tools of Monetary policy?