1. The Federal Reserve and Fiscal Policy

2. Monetary Policy
Defined: The actions that the Federal Reserve take to influence the money supply to achieve their stated macroeconomic goals of price stability and full employment.
Ways the FED Influences the Money Supply:
Increase / Decrease the Reserve Requirement
Increase / Decrease the Discount Rate
Buy or Sell U.S. securities (Treasury notes, bills, bonds)

3. The Money Supply
Is a measure of the total amount of money in an economy
The FED influences the money supply to achieve macroeconomic goals of:
Price stability
Full employment
Economic growth
The FED’s legislative mandate is to work on price stability and full employment. Economic growth is a consequence of achieving the other two. However, the content expectations note all three economic goals so we have done so too in this PowerPoint for consistency.

4. The Money Supply and Interest Rates
The FED influences the amount of lending and borrowing by using its tools to influence the money supply
By influencing the money supply, the FED indirectly influences the interest rate
Think of the interest rate being equivalent to the price of a good or service
Low interest rates= more borrowing (like low price= more buying)
High interest rates= less borrowing (like high price= less buying)
Interest rates reflect the interaction of lenders (who supply the funds) and borrowers (who demand the funds)
The FED uses reserve requirement, discount rate, and the buying and selling of securities to influence the money supply. For example, if the FED increases the reserve requirement, banks must have more money set aside (reserve requirement) and therefore have less to lend. Returning to our days of supply and demand, if there is less money available for borrowers, the price (interest rate) will be higher. Similarly, if the FED raises the discount rate, banks will be less likely to borrow from the FED because the costs are higher. Therefore, these banks will have less to lend the borrowers, ultimately driving up interest rates. Finally, if the FED wants banks to have higher interest rates, the Federal Open Market Committee (FOMC) can sell US securities. Those exchanges cause the FED to take money from banks, leaving less for borrowers. This will also raise interest rates.

5. “Easy Money” Monetary Policy
Used when the FED wants to stimulate growth due to a contracting economy
Effects/Consequences
Increases the money supply,
Which leads to lower interest rates
Encouraging investment , spending, and employment

6. “Tight Money” Monetary Policy
Used when the FED wants to slow growth due to a rapid expansion that may cause inflation
Effects/Consequences
Decreases the money supply,
Which leads to higher interest rates
Discouraging investment and spending
Which can lead to lower employment

7. How does the tax rate effect taxpayers?
Proportional
Regressive
Progressive

8. Proportional Taxes
Takes the same percentage or amount from both high and low income tax payers
Examples:
Michigan income tax - all are taxed on their income at the same percentage (4.35%)
Social Security Taxes (up to the limit): Everyone (employer and employee each) pays 6.2% up to $106,800

9. Regressive Taxes
Takes a larger share of income from low income taxpayers than from high income taxpayers
Examples (consumption taxes):
Sales tax- if an individual buys a new appliance and pays $40 in sales tax, this $40 tax affect someone with a lower income more than one with a higher income (6.00%)
Gasoline tax – everyone pays the same percentage but it ends up taking a greater percentage of one’s income from the lower income earners than higher income earners

10. Progressive Taxes
Takes a larger share of the income of high-income taxpayers than of low-income taxpayers.
Higher income levels are taxed at higher rates
Examples:
Federal individual income tax - the higher the income, the higher the tax rate
Brackets include 10% up to $8,375; 15% up to $34,000; 25% up to $82,400; 28% up to $171,850; 33% up to $373,650, 35% beyond $373,650 (single rates)
Corporate income tax rates

11. Effect on $20,000 income Effect on $50,000 income
Type of Tax
Effect on $20,000 income
Effect on $50,000 income
Effect on $100,000 income
Proportional Tax:
4.35% Michigan Income Tax
$ paid in taxes
$2, paid in taxes
$4, paid in taxes
Regressive Tax:
6% Michigan
Sales Tax
You buy new furniture and have to pay $500 in tax. This takes 2.5% of your total income
You buy new furniture and have to pay $500 in tax. This takes 1% of your total income
You buy new furniture and have to pay $500 in tax. This takes 0.5% of your total income
Progressive Tax:
Federal Income Tax
Taxed 15%
$3,000 paid in taxes
Taxed 25%
$12,500 paid in taxes
Taxed 28%
$28,000 paid in taxes