Lesson 14: fiscal and monetary policy

What are the causes of the great recession?

\-Home prices were dropping because banks were loaning money to financially irresponsible people

\-Gas increased by more than a dollar per gallon

\-food prices rose at an alarming rate

\-Job losses increased

\-Stock prices fell

What is fiscal policy?

The use of government spending in revenue (tax) collection, to influence the economy

What is monetary policy?

The central banks effort to control the amount of money in the economy

What is expansionary fiscal policy?

This is used to encourage economic growth

What is classical economics?

The idea that the government should have a minimal role in the economy

Who told FDR the great depression needed a different approach?

John Maynard Keynes

What was the Keynes approach?

Increase government spending by borrowing money and not increasing tax

What was the downside of government spending?

The national government engaged in heavy deficit spending

What did critics of Keynesian economics in the 1960s say the focus should be on?

Monetarism

What is the national debt present day?

$31.4 trillion

What caused the great depression?

A contraction of the money supply

By controlling the money supply, the government can do what?

Alleviate the ups and downs in the economy

What do the “ups” in the economy result in?

Inflation

What do the “downs” in an economy result in?

Unemployment

What is the Keynesian model?

Advocates that fiscal policies has more control in stimulating economic activities

What is the monetarist model?

Advocates that the flow of money supply has more control over the well-being of the economy, rather than fiscal policies

what is classical economics?

The theory, Adam Smith came up with stating that free markets operate under the laws of supply and demand which will regulate themselves

What is deficit spending?

Government spending in excess of what is collected in revenue

What is monetarism?

based off the ideas of Milton Freidman, stating changes in the money supply are the main causes of inflation and economic expansions or contractions

What is stagflation?

A period of slow, economic growth and high unemployment

What is the misery Index?

The sum of an inflation rate and unemployment rate

What is aggregate demand?

The total spending on goods and services in a period of time at a given price level

What is individual demand?

The quantity of a good in individual consumer demands at different prices

What is a Market demand?

The sum of all consumers demand for a good at a range of prices in a given time period

What are the goals in limits of fiscal policy?

\-expand or slow the economy

\-achieve full employment

\-Maintain price stability

Why do we want to expand the economy?

To stop a recession, or prevent a recession

Why would we want to slow the economy?

To stop inflation or slow inflation

How do we achieve full employment?

4-6% of employment without cyclical unemployment

Why is fiscal policy limited?

Because it is difficult to know which way the economy is heading

What does price instability cause?

Consumers to stop spending, which might put you in a recession

Are price indicators always right?

No

How are the government’s fiscal decisions shaped?

By budgetary needs and fiscal policy

What is at the bottom of fiscal policies toolbox?

Decrease in government spending (contractionary)

What is at the top of fiscal policies toolbox?

Increase in government spending (expansionary)

Why do governments use expansionary fiscal policy?

To encourage growth either to prevent a recession or to move the economy out of a recession

What is expansionary fiscal policy?

A policy designed to promote economic activity by increasing government spending, cutting taxes, or both

What is the multiplier effect?

Increasing aggregate demand while increasing GDP

What is contractionary fiscal policy?

A policy designed to lower information and cool an overheated economy by cutting government spending, increasing taxes, or both

Why would the government deliberately slow down the economies output?

Because if producers cannot expand production to keep up with increasing demand, they will raise prices, which causes inflation

What is demand side economics?

(Associated with Keynesian economics) the theory that the best way to deal with a sluggish economy is to stimulate overall demand by cutting individual income taxes. As consumer spend the money, they save on taxes on goods and services. Businesses will pick up in the economy will begin to grow

What is supply-side economics?

The theory that the best way to ensure economic growth is to simulate overall supply by cutting taxes on businesses and high income taxpayers. This theory assumes that producers and investors will use their tax savings to expand production, thereby stimulating the economy.

What type of government intervention does supply side economics favor? why?

Text cuts because they believe that Texas have a strong negative impact on the economic output

What is the Laffer Curve

Suggest that increasing taxes be on a certain point, will eventually lower government revenue

How does the multiplier effect act as a key tool of fiscal policy?

Any change in fiscal policy that the government makes has an impact on GDP that is much greater than the initial investment

How does the multiplier effect work?

\-it can help me economy grow when the government increases spending

\-It can snow economic growth when the government cut spending

Why do we want the government to try to smooth out the business cycle?

To make the highs last longer

Autonomic stabilizers

A physical tool that helps counter swings in the business cycle, without direct action by the government (president and congress)

What is a transfer payment?

They make autonomic stabilizers work by taking money from someone’s paycheck for someone else who needs it

How is the federal reserve system organized?

\-Seven member board of governors with one governor acting as chair

\-12 district reserve banks

\-4000 member banks, and 25,000 other depositary institutions across the country

Who is the feds overseen by?

The board of governors of the federal reserve

Who is the seven member board appointed by?

The president with advice and consent of the senate

The US is divided into how many districts?

12 federal districts with one federal reserve bank located in each district

Oh nationally chartered banks are required to join what?

The feds, though all banks have equal access to federal services, whether or not they are federal members

What is the easy money policy?

A monetary policy designed to accelerate the rate of growth of the money supply in order to stimulate economic growth

What is tight money supply?

A monetary policy designed to slow the rate of growth of the money supply in order to reduce inflation

What is the reserve requirement?

The regulation that requires banks to keep a certain percentage of deposits, on hand at all times, to repay their depositors

What is the open market operations?

The purchase and sale of government bonds by the federal reserve for the purpose of regulating the money supply and controlling interest rates

What is the required reserve ratio?

The minimum percentage of deposits that the bank must keep in reserves at all times

What is a discount rate?

The interest rate, the federal reserve charges on loans to private banks

What is the federal open market committee (FOMC)?

They make monetary policy decisions about interest rates, and the growth of the US money policy

The FOMC members include?

\- All 7 members of the board of governors

\-5 of the seven district banks

\-President of the New York feds

\-The six other district bank presidents

The FOMC makes decisions that can affect financial markets and rates for mortgages as well as many economic institutions around the world, so what are the FOMC’s tools?

\-Open market operations

\-Discount rate

What do the feds do?

\-serves as a banker and financial agent for the US government

\-Supervises lending practices

\-Acts as a lender of last resort

\-Regulates the banking system to reserve requirements and bank examinations

\-Regulate the money supply

\-sells, transfers, and redeems securities, such as the government bonds, bills, and notes

Under the feds, only the federal government can issue what?

Currency which takes place in the US mint

What is the federal funds rate?

The interest of banks charge each other for loans from their excess reserves

How was the federal funds rate determined?

By the “overnight rate” by regulating the money supply through open market operations

The feds protects consumers, by enforcing what?

Truth in lending laws which settlers provide for an accurate information about loans

The Fed board studies proposed think mergers to ensure what?

Competition in banking and financial industries

the fed coordinates the required activities of who?

banks, savings, and loans companies, credit unions, and bank-holding companies

Each finical institution that holds deposits for customers must do what?

report daily to the Fed about its reserves and activities

the fed uses the reserves to control?

how much money is in circulation at one time

too much money leads to what? how do the feds prevent this?

inflation and by keeping the money supply stable

In a world where GDP grew smoothly and the economy stays at full employment, the feds would do what?

increase the money supply to match the growth in the demand for money

the feds is best known for its role in what?

regulating the nation’s money supply through the federal funds rate

limits of fiscal policy include?

\-time delay

\-forecasting can be incorrect

\-concerns over the national debt may limit the governments ability to spend

\-for fiscal policy to be effective various branches and levels of governments must plan and work together