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Chapter 13
Federal Government Control of the Economy
Money
Characteristics of Money
• ____________ – easy to carry
• ____________ – can be divided into smaller units
• ____________ – will last when handled (average $1 bill lasts 13
months)
• ____________ – available in limited supply
Federal Reserve System
Duties of the Federal Reserve System
• Provides a __________________ from which member banks can
borrow
• Controls the amount of __________________________
• Controls the _________________________________
• Check ____________________________
Forms of Money
• ____________________________________
• _____________________________ (________________ accounts)
• _____________________________ (________________ accounts)
Money Supply Measured by Fed. Govt.
M1 = ___________________________, and __________________Deposits
M2 = M1 + ________________________ Deposits
M3 = M1 + M2 + ______________________ Deposits
What is Money?
Money Today
• Called ___________ Money – not convertible into
___________________________ (true since 1933)
• Paper money called ___________________________
• Value of currency only based on _____________ the economy places
on it.
How Supply of Money
“Grows On Paper”
Monday
$1000
DDA
Adam
Tuesday
Wednesday
Thursday
Monday - Adam puts $1000 into his DDA (Demand Deposit Account)
Tuesday –
Wednesday –
Thursday –
Increase In Money Supply
The government does not need to print additional currency for the
________________________________________.
A $1000 deposit has the potential to increase the supply of money __
times, given a ______% reserve requirement.
Federal Government Control of the Economy
Two Methods of Controlling the Economy
1. Monetary Policy
• Controls the __________________________ in the economy
• Controlled by the _________________________
• Federal Reserve called “_____________”
• Chairman of the Federal Reserve __________________________
• Chairman extremely _______________ … appointed by the
__________________ but once in office can act without political
pressure.
2. Fiscal Policy
• Controls _____________________________________
• Done by _________________ (tax legislation begins in the
___________________)
• Speaker of the House ___________________ (____________)
Basics
When inflation is a problem, ___________________ the economy.
Make people spend ________ money and shop
___________________ to ___________ price.
When unemployment is a problem, _________________ the economy.
Make people spend _________ money which will _______________.
Monetary Policy
During inflationary period, slow down the economy by
____________________ money supply.
During high unemployment, stimulate the economy by
____________________ money supply.
Methods of Monetary Policy
 Change the Reserve Requirement
o The reserve requirement is the amount of _______________
money that must be _______________ and not _____________
by the bank.
o Increasing the reserve requirement would decrease the money
supply, as _________________ would be available for
borrowing. (And what is left for borrowing will command a
________________ interest rate).
o Decreasing the reserve requirement would ______________ the
money supply, as more __________ would be available for
borrowing. (An because there is more money for lending, the
interest rate would be _________.)
o The reserve requirement has remained at _____% as Da Fed
uses other methods to change money supply.
 Buying and selling of government securities
o Securities are government bonds (loans to govt.) to finance the
debt
o To decrease money supply, the government ________
additional bonds by ____________ the interest rate that they
pay (selling bonds ___________________________________)
o To increase money supply, the government buys _________
bonds that are in consumer’s hands. (Buying bonds _________
________________________________)
o Also not the main tool used to control money supply
 Change Interest Rates
o ___________________ Rate: the rate that the federal reserve
charges member banks to borrow from them for one day.
o _____________________ Rate: The rate that banks pay to
borrow from each other for one day.
o __________________ Rate: The rate that banks charge their
best corporate customers to borrow for one day. Approximately
2% above the discount rate.
o Recently, _____________________ rate has been changed by
Da Fed as the main tool for adjusting money supply.
Methods of Monetary Policy
Change Interest Rates (cont.)
 To increase money supply, _____________ interest rates
which will allow ____________ people to borrow money.
 To decrease money supply, _____________ interest rates
which ________________ some people from borrowing.
FRB: Monetary Policy, Open Market Operations
Federal Funds Rate Data - Federal Reserve Bank of New York
Prime Rate – Current Prime Interest Rate and Prime Rate History
Current Federal Funds Rate _________
Current Prime Rate _________
Methods of Fiscal Policy
 Change taxes
o _______________ taxes takes money out of the economy
and would cause a _____________.
o _______________ taxes puts money in people’s hands and
would ______________ the economy.
 Change government spending
o Remember that government is the largest employer and
consumer
o _________________ government spending will put money
into people’s hands and stimulate the economy
o _________________ government spending will take money
away from people and slow down the economy.
Summarize Monetary and Fiscal Policy
Stimulate Slowdown
Monetary Policy – Da Fed
Reserve requirement
________ ________
Government Securities ________ ________
Interest Rates
________ ________
Fiscal Policy – Congress
Taxes
Government Spending
________ ________
________ ________
Time Lags
________________ – the time between when a problem is
___________and when ________________
________________ – the time between when __________________and
the ______________is noticed
Monetary Policy
Inside Lag: _______________
Outside Lag: _______________
Fiscal Policy
Inside Lag: _______________
Outside Lag: _______________
Problems
•
•
When changes are made before the __________________ of past
changes have been realized, big problems occur.
Example: Lowering taxes when there is inflation about to occur
from a previous stimulation.
____________________ sometimes prevent politicians from making
the correct adjustment.
Example: A politician lowers taxes in order to get
___________________ even though inflation is a problem.
Normally…
Fiscal Policy is used to _______________ the economy (popular for
politicians to do this.
Monetary Policy is used to ________________ the economy (let Da
Fed do the “__________________”)
Today… both are being used to stimulate the economy.
Theories on How to Control The Economy
Demand Side Economics
 Developed by _____________________
 Called ________________________ Theory
 Goal of demand side economics is to stimulate the economy using
fiscal policy
 Remember: Keynes said deficit spending was _____ in the short
run.
 The theory is that to stimulate the economy you
_____________________ by increasing ___________________.
 The fiscal policy is known as “____________________” which
means that it is used to get _______________________________.
 ____________________ affect – when consumer spending
increases, _______________ spending (buy ____________) will
increase as a result.
 Example: When people buy more cars, manufacturers buy new
factories to make the additional cars.
 ____________________ affect – when investment spending
increases, ____________________ will increase.
 Example: When factories expand, more workers are hired which
creates __________________________ that are spent in the
economy.
Demand Side Flowchart
Theories on How to Control the Economy
Supply Side Economics
• Developed by Milton Friedman (______________________ economic
advisor)
• Goal is to stimulate the economy using incentives to create
_____________________________.
• Done by providing ____________________________________
____________________________________________________
Supply Side Flowchart
Recent History
The 1980’s
• _____________________– Double digit inflation and unemployment
• Ronald Reagan and Milton Friedman developed “________________”
• Under Reagonomics
– Cut ____________ to fight _______________________
– Cut ____________________ to fight ___________________
– Encouraged people to __________ tax savings by making IRA’s
attractive. This created a _____________________ for business to
________________.
– __________________________ of business
• Reaganomics worked except for the fact that government spending
actually _________________________ as we have studied.
• Eventually ______________________ were needed to slow inflation.
The 1990’s
• Largest _____________________ in history.
• Pledge by _________________ to balance the budget, which he did in
late 90’s.
Recent History (cont.)
The Economy Today
 “_____________________” has changed everything
 9/11 was an attack on the _______________________________.
 Nerves of investors and business have caused a slow down.
 _____________ have been cut and ________________ are at their
lowest levels in 40 years to stimulate the economy.
 Tax cuts during increased spending increase the amount of the
______________ to record levels.
 ____________________ is creeping up
 ___________________ has remained steady except for oil prices.
 _______________ in increasing at a slow but steady pace.
The Future
What lies in the future for our economy?
_____________________
The strength of our economy rests in the fundamentals of the
___________________________________. As long as there is
incentive to ________________, make a ___________, an
_________________________, we will remain a strong economy!
The End