Presentation on theme: "Economic Policymaking"— Presentation transcript:
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 tableEmployment Grade(2 pieces of evidence)Price Stability GradeGrowth 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 marketMixed-EconomyVS.Capitalism: individuals and corporations, not the government, own the principle means of productions and seek profitsMixed Economy: the GOVERNMENT is deeply involved in economic decisions through its role as:RegulatorConsumersubsidizertax-collectoremployer 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 economyCongress 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 governmentGovernment actions can make up for changes in other 2Who’s the Economist behind the idea?John Maynard KeynesWhat’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 goodsKeynes 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 moneyWho’s the Economist behind the idea?Milton FriedmanWhat’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 harderWhat’s the role of the Government?To increase the supply of goodsSupply side-a school of economics that believes that tax cuts can help an economy by raising supplyTries 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 forEconomic conditions are the best predictor of voters’ evaluation of the President
10 What does everyone (voters and politicians) want to control? Unemployment rateInflationConsumer Price IndexUnemployment 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 rate3.5% Gross Domestic Product3.5 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 economyThe Policy that describes the impact of the federal budget on the economyCongress 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.”KeynesWhat 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 PropertySpending Budget/government programs SubsidiesIncome 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 taxPropertySubsidy: Direct, transfer, or indirect payments, grants, contracts, loans, tax breaks, tariffs, loans.Direct: buy itSubsidy: grow a product that gov wont buy but knows consumers willTransfer: goes into an account that can’t touchIndirect 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 PolicyUnemployment 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 recessionContractionary 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 GovernorsLocated in Washington with 12 reserve banks around US.Appointed by President to 14 year term; must be approved by SenateCentral bank of the U.S; Controls monetary policyFormed in 1913 to regulate banks and money supplyUses currency from the Treasury to inject money into economyLends 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 governmentConducts monetary policyLocated 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 BernankeFed Board of Governors are not elected. They are appointed by the president and approved by Senate; serve 14 year terms.Chairman Ben BernankeNot responsible to the President, only the economy; Board serves 14 year terms and are Appointed by the President; must be approved by the SenateChairman serves 4 year termsSeven members of Board of GovernorsBoard of Governors serve 14 year terms (chairman chosen from this group)The Federal Reserve plays an important role in affecting the health of the economyMonetary 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 moneyRR: 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 RequirementPRIME CREDIT RATEOpen Market OperationsAll 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 monthsPrefers 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 BondsSelling BondsTreasury 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 millionOMO: buying and selling government treasury bonds (buying bonds expands the economy because you are putting $ in the economy)Money SupplyMoney 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 PolicyUnemployment 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?