econ test 4

FISCAL POLICY - define; 

The discretionary changing of government expenditures or taxes to achieve national economic goals, such as high employment with price stability  

Add what it involves →government spending and taxes

DEVELOPED BY WHO AND WHEN; (fiscal policy and monetary policy)

John Maynard Keynes, in 1930

HOW TO USE WHEN RECESSION OR INFLATION;

Recession → goal is to stimulate the economy.  1. Lower taxes (goal is to make people spend more $) 2. Increase gov spending. (expansionary fiscal policy)

Inflation → slows down the economy. 1. Raise taxes 2. Lower gov spending (contractionary fiscal policy)

3 FISCAL POLICY TIME LAGS;(problems)

•  recognition time lag

The time required to gather information about the current state of the economy.

problem→ The government is slow to realize the economy is in trouble.

• action time lag

The time between recognizing an economic problem and implementing policy to solve it. The action time lag is quite long for fiscal policy, which requires congressional approval.

problem→Even after recognizing the problem, it takes a long time to decide what to do.

• effect time lag

The time that elapses between the implementation of a policy and the results of that policy

Problem→ Once a fiscal policy is approved, it still takes time to go into effect.

AUTOMATIC STABILIZERS.

Special provisions of certain federal programs that cause changes in desired aggregate expenditures without the action of Congress and the president. 

Examples are the federal progressive tax system and unemployment compensation (SNAP).

GOVERNMENT BUDGET DEFICIT/SURPLUS/BALANCED BUDGET;

• government budget deficit

An excess of government spending over government revenues during a given period of time.

• balanced budget

A situation in which the government’s spending is exactly equal to the total taxes and other revenues it collects during a given period of time.

• Government budget surplus    1998-2001

An excess of government revenues over government spending during a given period of time.

U.S. HISTORY WITH DEFICITS/SURPLUSES; 

Surpluses: Rare

• Mostly occurred in: 1800s, late 1940s–1950s, late 1990s (the most notable)

Deficits: Common

• Especially during: Wars, Recessions, Major economic crises, Periods of tax cuts combined with high spending

Why the U.S. Runs Deficits So Often

• Government spending grows faster than revenue

• Wars and national emergencies

• Recession → lower tax revenue

• Political unwillingness to raise taxes or cut spending

• Long-term commitments like Social Security & Medicare

NATIONAL DEBT;

The national debt is the total amount of money the federal government owes to creditors.

It is the accumulation of past budget deficits minus any surpluses.

ENTITLEMENTS.

Guaranteed benefits under a government program such as Social Security, Medicare, or Medicaid.

4 FUNCTIONS OF MONEY;

1. Medium of exchange: Any item that sellers will accept as payment.

2. Unit of accounting: A measure by which prices are expressed; the common denominator of the price system; a central property of money

3. Store of value: The ability to hold value over time; a necessary property of money

4. Standard of deferred payment: A property of an item that makes it desirable for use as a means of settling debts maturing in the future; an essential property of money.

BARTER

The direct exchange of goods and services for other goods and services without the use of money

LIQUIDITY – MOST LIQUID ASSET;

The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs. Money (cash)  is the most liquid asset.    (immediate purchasing power) 

FIDUCIARY MONETARY SYSTEM;

A system in which money is issued by the government and its value is based uniquely on the public’s faith that the currency represents command over goods and services and will be accepted in payment for debts.  (fiducie=trust)

M1 MONEY SUPPLY; (most narrow)

The money supply, measured as the total value of currency plus transaction deposits, plus traveler’s checks not issued by banks.         (debit cards and checks = transactions and saving deposits)

THE FED – HISTORY AND ORGANIZATION STRUCTURE;

HISTORY

• Created in 1913 to stabilize banking system

• Strengthened during Great Depression

• Gained independence in 1951

• Major role during 2008 and COVID-19 crises

ORGANIZATIONAL STRUCTURE

1. Board of Governors – 7 members, policy leadership

2. 12 District Banks – regional operations

3. FOMC – controls interest rates & open market operations

FUNCTIONS OF THE FED.

Conducts monetary policy

Regulates and supervises banks

Maintains financial system stability

Provides financial services to banks

Acts as fiscal agent for U.S. government

Manages money supply

Protects consumers

FDIC 

Started in 1933

A government agency that insures the deposits held in banks and most other depository institutions. All U.S. banks are insured this way.

 Helps to avoid bank runs (Attempt by many of a bank’s depositors to convert transactions and time deposits into currency out of fear that the bank’s liabilities may exceed its assets.),