Definition: Taxing and spending policies determined by the legislative and executive branches of government.
Focus: How the government decides its budget and allocates funds to stimulate or slow down the economy.
Monetary policy
Definition: Strategies that involve the control of the money supply to achieve economic objectives.
Components: Changes in interest rates and money available in the economy.
Interest rate
Definition: The price that borrowers pay lenders for the use of borrowed money, typically expressed as a percentage.
Inflation
Definition: Economic condition characterized by rising prices which reduces the purchasing power of currency.
Implication: As inflation rises, the value of money decreases.
Stagflation
Definition: A simultaneous occurrence of slow economic growth, high unemployment, and inflation.
Challenge: Difficult for policymakers to address as it encompasses contradictory economic indicators.
Market Economy
Definition: An economic system where the prices of goods and services are determined by supply and demand through interactions between buyers and sellers.
Economic Theories
Keynesian Economics/Keynesianism
Definition: Economic theory advocating for increased government expenditures and lower taxes to stimulate demand and pull the economy out of recession.
Notable Characteristics:
Government spending is essential during economic downturns.
Advocates for fiscal policies to react to economic needs.
Laissez-Faire Economics
Definition: Economic philosophy of free-market capitalism that opposes government intervention in the economy.
Notable Characteristics:
Belief that competition naturally regulates the economy.
Support for minimal government regulation and intervention.
Supply-Side Economics
Definition: Economic theory advocating for policies that increase production and supply as a means to stimulate economic growth.
Notable Characteristics:
Proposes cutting taxes to encourage businesses and individuals to invest in the economy.
Advocates for reduced government spending and deregulation.
Monetary Policy: The Federal Reserve
What does the Federal Reserve do?
Role: Acts as the central bank of the U.S. and manages the nation's monetary policy.
Objectives:
Control the nation’s money supply.
Stabilize prices and ensure maximum employment.
Maintain moderate long-term interest rates.
What kind of agency is the Federal Reserve?
Type: An independent agency within the federal government.
Who controls the Federal Reserve System?
Leadership: Managed by a Board of Governors, with a chair appointed by the President of the United States.
Oversight: The Federal Reserve is subject to oversight by Congress.
How does the Fed control the nation's money supply?
Strategies:
Adjusting interest rates to either encourage or restrict borrowing.
Implementing monetary policies to promote or slow economic growth as needed (e.g., lowering taxes, regulating spending).
How does changing interest rates affect the nation's economy?
Effects:
Lowering interest rates can stimulate economic activity by making borrowing cheaper.
Raising interest rates can help combat inflation and stabilize the economy by reducing spending and borrowing.