1. Economic Policymaking
How should our government direct fiscal and monetary policy to achieve our economic goals?

2. EVALUATE THE STRENGTH OF THE US ECONOMY
Create a poster that reflect the consensus at your table
Employment Grade
(2 pieces of evidence)
Price Stability Grade
Growth in GDP Grade
(2 pieces of Evidence)
Average over all Grade Student Names

3. So why should I care about the economy?
Current numbers: U.S. population: 319,213,000 (Oct. 2014) Inflation: 1.7% (Sept. 2014) Unemployment: 5.9% (Sept. 2014) Growth rate: 4.6% (Quarter ) Deficit: $492 Billion (1/3 less than 2013) Debt: $ Trillion

4. What kind of an economy do we have, anyway? Who’s in control?
Capitalism/Free market
Mixed-Economy
VS.
Capitalism: individuals and corporations, not the government, own the principle means of productions and seek profits
Mixed Economy: the GOVERNMENT is deeply involved in economic decisions through its role as:
Regulator
Consumer
subsidizer
tax-collector
employer borrower.

5. The federal government plays an important role in affecting the health of the economy
Fiscal Policy: The use of spending and taxation to stimulate or slow down the economy.
The Policy that describes the impact of the federal budget on the economy
Congress and the President control Fiscal policy
-used to achieve economic growth, full employment and price stability

6. Who should control the economy? The consumer or the government?
Liberals tend to favor more government involvement in the economy.
Conservatives tend to favor less government involvement in the economy.
Liberals and Democrats tend to favor more government involvement in the economy.
usually worry more about workers and consumers (Demand-side policies)
Conservatives and Republicans tend to favor less government involvement in the economy.
usually more worry about consumers and business (Supply-side policies)

7. Demand-Side Economics
What’s the big idea?
Economy composed of 3 sectors-businesses, individuals and government
Government actions can make up for changes in other 2
Who’s the Economist behind the idea?
John Maynard Keynes
What’s the Theory?
Government spending, tax cuts and deficits help the economy weather its normal ups and downs.
What’s the role of the Government?
Government’s job to increase demand of goods
Keynes presented his ideas in 1936; how to get out of economic crises like the Great Depression and tell them how to avoid crises.
Govt spend money to stimulate the economy; this would encourage production and increase employmnt; then people would go back to work, spend money and economy would expand
-Called demand side because it involves changing demand to help the economy

8. Supply-Side Economics
What’s the big idea?
Taxes have a strong negative influences on economic output.
Consumer stimulates the economy by spending money
Who’s the Economist behind the idea?
Milton Friedman
What’s the Theory?
There is too much taxation and not enough money to purchase goods and services.
Reduce taxation and government regulation then people will work harder
What’s the role of the Government?
To increase the supply of goods
Supply side-a school of economics that believes that tax cuts can help an economy by raising supply
Tries to increase economic growth by increasing supply of goods;
Ronald Regan used supply side- Reagonomics; tax cut by 25%, Fed tightened money supply to reduce inflation, brief recession in 1982; then economy recovered and flourished

9. How does the economy control voter behavior?
Economic trends affect who the voters vote for
Economic conditions are the best predictor of voters’ evaluation of the President

10. What does everyone (voters and politicians) want to control?
Unemployment rate
Inflation
Consumer Price Index
Unemployment rate: : Measured by the BLS, the proportion of the labor force actively seeking work, but unable to find jobs.
Inflation:The rise in prices for consumer goods.
The key measure of inflation that relates the rise in prices over time.
4-5%; unemployment rate
3.5% Gross Domestic Product
3.5 Consumer Price Index

11. How do Congress and the President work to “control” the economy?
Fiscal Policy: The policy that describes the impact of the federal budget on the economy.
The federal government plays an important role in affecting the health of the economy
The Policy that describes the impact of the federal budget on the economy
Congress and the President control Fiscal policy
-used to achieve economic growth, full employment and price stability

12. How would you summarize this statement about the government and the economy?
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
Keynes
What is the view of Gov? What is the view of the consumer? Political devotees: FDR,

13. How would you summarize this statement about the government and the economy?
“I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.”
Friedman; Reagan, Hoover

14. There are two tools of Fiscal Policy
Taxes Income tax (Progressive) Sales Payroll Property
Spending Budget/government programs Subsidies
Income tax: Progressive rates (brackets); a tax by which the tax rate increases as the taxable base amount increases.
Sales tax: Flat rate (with regressive effects)
Payroll (progressive up to $106,800 for Social Security tax)- The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax
Property
Subsidy: Direct, transfer, or indirect payments, grants, contracts, loans, tax breaks, tariffs, loans.
Direct: buy it
Subsidy: grow a product that gov wont buy but knows consumers will
Transfer: goes into an account that can’t touch
Indirect payment: uses SS trust fund but knows that it has to pay back; payback is indirect payment

15. What should the government do if…
Unemployment is 8% GDP is 1.6% Inflation is 2% STIMULATE THE ECONOMY! AKA Expansionary Fiscal Policy
Unemployment is 4% GDP is 4% Inflation is 8% SLOW DOWN THE ECONOMY! AKA Contractionary Fiscal Policy

16. Fiscal policy desicions
Expansionary Fiscal Policy: Decrease taxes Increase spending Result: Consumers have MORE money to spend!
Contractionary Fiscal PolicY: Increase taxes Decrease spending Result: Consumers have LESS money to spend!
Expansionary Policies- fiscal policies, like higher spending and tax cuts, that encourage economic growth; use when the govt is in a recession or to try to prevent a recession
Contractionary Policies- Fiscal policies, like lower spending and higher taxes that reduce economic growth

17. What is “the FED” (Federal Reserve)?
The main instrument for making monetary policy in the US.
Created in 1913 to regulate banks and money supply (stop PANICS!)
Seven Members of Board of Governors
Located in Washington with 12 reserve banks around US.
Appointed by President to 14 year term; must be approved by Senate
Central bank of the U.S; Controls monetary policy
Formed in 1913 to regulate banks and money supply
Uses currency from the Treasury to inject money into economy
Lends commercial banks money (discount rate)
Sets interest rates for banks to borrow from it (discount rate) and each other (federal funds rate)
All profits go to federal government
Conducts monetary policy
Located in Washington with 12 reserve banks around US

18. How can the the FED “control” the Economy?
Monetary Policy and “the Fed”
It manipulates the money supply in private hands – too much cash and credit produces inflation.
Current Chairman of the Fed: Ben Bernanke
Fed Board of Governors are not elected. They are appointed by the president and approved by Senate; serve 14 year terms.
Chairman Ben Bernanke
Not responsible to the President, only the economy; Board serves 14 year terms and are Appointed by the President; must be approved by the Senate
Chairman serves 4 year terms
Seven members of Board of Governors
Board of Governors serve 14 year terms (chairman chosen from this group)
The Federal Reserve plays an important role in affecting the health of the economy
Monetary Policy: The use of adding or subtracting money from the economy (through banks) to stimulate or slow down the economy.

19. How does “The FED” control the economy?
The Fed uses tools to influence the supply of money in circulation:
Sets prime credit rate (PCR)
Sets reserve requirements (RR)
Open Market Operations (OMO)
Use of these tools helps to EXPAND or CONTRACT the economy.
PCR: amount the fed charges banks to borrow money
RR: amount banks are required to have in reserve (% of deposits)
OMO: buying and selling government treasury bonds (buying bonds expands the economy because you are putting $ in the economy)

20. The Fed uses three tools to conduct monetary policy
Reserve Requirement
PRIME CREDIT RATE
Open Market Operations
All three of these tools use BANKS to control the amount of money in the economy.

21. Why do you think they do this?
All three of these tools use BANKS to control the amount of money in the economy.
INTEREST- The interest rate is the amount banks charge us to borrow from them.
Banks generally charge HIGHER interest rates when they have LESS money, and LOWER interest rates when they have MORE money.
Why do you think they do this?
All three of these tools use BANKS to control the amount of money in the economy.

22. The Reserve Requirement is the minimum amount of funds banks must keep in their vaults
Least often used (last changed from 12% to 10% in 1992 due to savings and loan crisis)
RR: amount banks are required to have in reserve (% of deposits)
-Requirements vary based upon the size (in total amount of transactions) of the depository institution. - For institutions with up to $10.7 million, there is no minimum reserve requirement.
-Institutions with over $10.7 million and up to $55.2 million in net transaction accounts must have a liquidity ratio of three percent.
- Institutions with more than $55.2 million in net transactions must have a liquidity ratio of 10%.
= LESS money to lend out, so will they charge higher interest rates to us for the money they DO lend out.
= MORE money to lend out, so will they charge lower interest rates to us for the money they lend out.

23. The Prime Credit Rate is interest the FED charges banks to borrow money
Once banks know how much the FED will charge THEM to borrow money, they decide how much to charge US to borrow (i.e. interest). Generally, the following rules apply:
Fed doesn’t encourage this, only keeps discount “window” open every 3 months
Prefers banks borrow from themselves (federal funds rate)
Regardless, the DR establishes all other interest rates (mortgages, loans, etc.)
= LESS money to lend out, so will they charge higher interest rates to us for the money they DO lend out.
= MORE money to lend out, so will they charge lower interest rates to us for the money they lend out.

24. Open-market operations is the most successful and often used tool of monetary policy
Buying Bonds
Selling Bonds
Treasury bonds-a certificate of debt that is issued by the government in order to raise money; Essentially a loan to the Govt. ; low risk; exempt from state and local taxes; mature in years; $1000 to $1 million
OMO: buying and selling government treasury bonds (buying bonds expands the economy because you are putting $ in the economy)
Money Supply
Money Supply

25. Buying and selling bonds has two different effects on the economy and consumers.
When the Fed BUYS bonds it is PUTTING MORE MONEY INTO the economy. How will banks respond to this? By charging us LOWER interest rates! We will borrow MORE money!
When the Fed SELLS bonds it is TAKING MONEY OUT of the economy. How will banks respond to this? By charging us HIGHER interest rates! We will borrow LESS money!

26. What should the Fed do if…
Unemployment is 8% GDP is 1.6% Inflation is 2% STIMULATE THE ECONOMY! AKA Expansionary Monetary Policy
Unemployment is 4% GDP is 4% Inflation is 4% SLOW DOWN THE ECONOMY! AKA Contractionary Monetary Policy

27. Monetary policy decisions
Expansionary Monetary Policy: -Decrease the Reserve Requirement -Decrease the discount rate -Buy Bonds Result: Banks have MORE money to lend, and consumers have MORE money to spend!
Contractionary Monetary Policy: -Increase the Reserve Requirement -Increase the discount rate -Sell bonds Result: Banks have LESS money to lend, and consumers have LESS money to spend!

28. Economic Policymaking
Who’s in control of our money?
How does this relate to politics?