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Fiscal Policy

Fiscal Policy. Chapter 15. Fiscal Who?. Fisc- latin for bag or basket Fiscal Policy – use of gov’t spending and revenue collection (taxing) to influence the economy .

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Fiscal Policy

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  1. Fiscal Policy Chapter 15

  2. Fiscal Who? • Fisc- latin for bag or basket • Fiscal Policy – use of gov’t spending and revenue collection (taxing) to influence the economy. • Gov’t spends nearly $250m every hour • Used to achieve: • Economic growth • Full employment • Price stability

  3. Federal Budget • Federal Budget – written document showing money expected to come in and where it will be spent. • Plan to pay the government’s expenditures for a year. • Fiscal Year – 12 month period of a budget (usually OCT 1-SEPT 30) http://www.youtube.com/watch?v=_mfMG66LtVU&feature=related

  4. Process of the Budget • President gained an upper hand in creating the federal budget in 1921 when the Office of Management and Budget (OMB) was created to formulate the budget • Congress clawed back some power in 1974 creating the Congressional Budget Office (CBO) as a non-partisan scorekeeper • Fiscal year starts on October 1 and proposed budget must be submitted no later than 1st Monday in February • When a President’s approval rating is high, or his party controls Congress, he is more likely to get more of his spending approved

  5. http://www.kowaldesign.com/cgi/Budget.pl?estimates=111111

  6. Fiscal Policy: Grow • Expansionary policies – attempt to increase demand and output • Encourage growth by either increasing government spending and/or cutting taxes. • Govt spending increases aggregate demand to higher prices, higher supply hire more workers http://www.youtube.com/watch?v=1qhJPqyJRo8&feature=related

  7. Fiscal Policy: Slow • Contractionary Policies – decrease output and demand to slow growth • To prevent demand from exceeding supply • Prevents inflation • Govt spends less, slows down GPDlower prices

  8. Taxes • Gov’t can also use taxes to influence economic growth and stability • Decrease (cut) in taxes puts more money in hands of business and consumers, encouraging them to spend and invest • Increase (raise) in taxes takes money from consumers and businesses encouraging them to spend and invest less

  9. Realities of Fiscal Policy • Fiscal policy is very theoretical and can be clumsy and difficult at times • Changes in spending usually take a year to materialize • Congress and president are elected officials who want to create policies beneficial to those who vote for them • Different levels of gov’t have to work together to coordinate policy from national, state and local levels

  10. Federal Reserve & Monetary Policy Chapter 16

  11. Monetary Policy • Named for the “minting of coins” and drawn from the Roman Goddess Moneta 200 years before the common era • Central government and commercial bank • Regulator of banking industry • Monitors money supply • Stabilizer of economy • Printer of money

  12. Structure of the FED • Monetary Policy – actions the FED takes to influence the level of GDP and inflations • Board of Governors – oversees the Federal Reserve • 7 members with staggered 14 yr terms • Appt by the President, serve 1 term • Chair of the Board of Governors – appt by Pres, approved by the Senate – serves a 4 yr term,renewable

  13. FED Structure

  14. Twelve District Banks • 12 districts and central district banks • 25 branches • Monitor and report economic and banking conditions • Member banks – national banks must join the FED • FAC – Federal Advisory Council – collect info and reports to the Board • 1 member from each district

  15. Federal Open Market Committee • Makes key decisions about interest rates • Decisions are announced to the public • Members come from the Board of Governors + 5 district bank Presidents http://www.youtube.com/user/mjmfoodie#p/u/13/aMg3vrQ6keE

  16. What is the FED? • Banker for the government • Banker for member banks • Regulator of banking industry • Tracker/ monitor of money supply • Stabilizer of economy • Printer of money • Overseer mergers Ben Bernanke Federal Reserve

  17. Baum’s Wonderful World • Dorothy: crusading Populist • William Jennings Bryan • The Wiz: Central Banker • “The Fed” • Emerald City: D.C. • OZ: abbreviation for ounces • Silver “ruby” slippers: bimetallism • Yellow Brick Road: Gold Standard • Lion: cowardly Populist party • Tin Man: Industrial Workers • Scarecrow: Poor farmers • Tornado: Panic of 1893

  18. Federal Reserve: the banker’s bank • Banker for the U.S. gov’t • Sells, buys, transfers, currency • Issues currency and coins • Check clearing – (p421) • Supervises bank lending • Discount rate – rate the Fed charges for loans to commercial banks

  19. Functions of the Fed • Fed monitors the reserves (cash) that banks keep • Enforce truth-in-lending laws • Oversee bank-to-bank lending • Interest rates banks charge other banks is the federal funds rate • Reports on conditions of banks and their net worth or their investments • http://www.clevelandfed.org/About_Us/who_we_are/about_the_system/index.cfm • http://www.pbs.org/wgbh/pages/frontline/meltdown/view/?utm_campaign=viewpage&utm_medium=grid&utm_source=grid • “taking away the punch bowl just when the party gets started” ~William McChesney Martin

  20. Factors Affecting Demand • What affects the demand for cash? • Cash on hand • Interest Rates • Price levels • General level of income Treasury Department

  21. Monetary Policy Tools *RRR* • Money creation – putting dollars into circulation • You take out a loan and put it into a checking acct. • Bank has to only keep a certain amount (required reserve ratio) of your money on hand. • Bank lends out the remaining money.

  22. How Money is Created • Acme bank has $10,000, RRR of 10% • Thus, it holds $1,000 in reserves and loans the 0ther $9,000 • A new deposit of $1,000 arrives • No change in the money supply • Yet now bank holds $900 in excess of RRR (which is $1,100)

  23. Money Creation • Acme Bank will loan out this excess of $900 by just crediting another customer’s account • Thus there is $900 dollars of new money, not actually existing in supply (physically), but available to someone

  24. Reserves • Money Multiplier formula – 1/ RRR • Tells how much the money supply will increase after an initial cash deposit to the banking system • Everything in excess of required reserves is theoretically loaned out, thus creating new money

  25. Reserve Requirements • Reducing the RR frees up money in local banks allowing them to make more loans • Increasing the RR tightens up the money supply because banks have less money to lend out. • RR up, money supply down • RR down, money supply up

  26. Discount Rate • Discount rate – interest FED charges on loans to financial institutions • Changes in the discount rate affect the prime rate (rate of interest banks charge their best customers) • Discount rate down – more money lent out, increased money supply • Discount rate up – less money lent out, decreased money supply

  27. Open Market Operations • Most important tool used by the FED • Involves bond sales • Decrease the money supply – sells govt securities to dealers to take money out of circulation • Increase the money supply by buying gov’t securities to put money into circulation http://www.youtube.com/watch?v=L0hQfaxYU8k

  28. http://www.youtube.com/user/mjmfoodie#p/u/12/HdZnOQp4SmU

  29. MoneyPolicy • Tight money policy • Fed wants to reduce the money supply, raise interest rates, spending slows down • Easy money policy • Fed wants to expand or stimulate the economy – increase money supply http://www.frbsf.org/education/activities/chairman/index.html

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