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Transcript
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