1. 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?

2. 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.

3. 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)

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

5. 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 expenses are withdrawn from the System)

6. Organization of the Federal Reserve System

7. How is the Fed organized?

8. 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

9. 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

10. 12 banks in different regions; responsible for printing paper currency
District Banks
12 banks in different regions; responsible for printing paper currency

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

12. #4: Provide check-clearing services #5: Supervise member banks - sets reserve limits #6: Serve as “lenders of last resort”

13. 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)

14. 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

15. 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

16. FISCAL POLICY

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

18. 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

19. 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