Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Economics: Fiscal and Monetary policy
Document related concepts
Non-monetary economy wikipedia , lookup
International monetary systems wikipedia , lookup
Business cycle wikipedia , lookup
Interest rate wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Quantitative easing wikipedia , lookup
Monetary policy wikipedia , lookup
Keynesian economics wikipedia , lookup
Helicopter money wikipedia , lookup
Transcript
ECONOMICS: FISCAL AND MONETARY POLICY Important Vocabulary Fiscal Policy Monetary Policy Deficit Spending Stagflation Multiplier Effect Easy-Money Policy Tight-Money Policy Crowding-Out Effect A Case Study: 2008 Where were you in 2008? What was going on? Housing Market crisis Homes devalued---sometimes less than owed in mortgage Rise in oil prices--- gasoline goes from $3 to $4 Filling up cost some $100 or more Food prices rose as well---People began packing lunch Cafeteria prices rose by 32 cents on average Job losses---cut back on spending How could this happen? Each recession or economic downturn is slightly different than the last one We have two stop-gap institutions that try to stop these situations from happening, or at least minimize them Federal Policy to tax and spend Federal A Government----Uses Fiscal Policy Reserve----Uses Monetary Policy central bank; controls the money supply Origins of Fiscal and Monetary Policy Prior to 1930s, very little involvement Great Depression changed that Classical Economics Give the market time; it would sort itself out Low taxes, low spending, balanced budget FDR originally believed in this until… John Maynard Keynes Economic problems caused by lack of spending Thus, either reduce taxes or increase spending At odds with Classical; “in the long run, we’re all dead” Keynesian Economics Deficit Spending: Government spends more money than it collects in revenue To finance spending, government borrows money by selling bonds Eventually convinced FDR---he used it to moderate success Eventually WWII helped get us out of Depression, but at a cost---budget deficit skyrocketed Result: “We are all Keynesians now.” Milton Friedman Critic of Keynes Argued Depression was result of lack of demand Called for monetary policy, not fiscal The Federal Reserve should have expanded the money supply Monetarism—control money supply to manage economy Money supply grows too fast---inflation Money supply grows too slow---deflation; spending low Tools of Fiscal Policy Economic goals—low unemployment, stable prices, economic growth How to achieve them? How much to collect in taxes? How much to spend? Examples of fiscal policy 2008---Stimulus checks (Expansionary Policy) Contractionary Policy---economy is overheated; increase taxes, cut spending to slow it down Using Tax Cuts to Stimulate Growth Demand side economics Cutting individual income taxes Supply side economics Cutting taxes on businesses and high income tax payers Sometimes called “Trickle Down Economics” Reagan believed in this; cut corporate tax rate from 48 to 34%, and top income tax rate from 70 to 28% Economy did grow, but at a cost---budget deficits grew Why increase government spending? Multiplier Effect Theory that each dollar spent creates more spending, like a ripple effect throughout the economy Example: Hire a teenager for $1000 a week Saves $300, spends $700 on a new bike Bike shop owner saves $200, spends $500 on car repairs Mechanic saves $100, spends $400 to hire a painter $1000 + $700 + $500 + $400 = $2,600 in economic activity generated by a $1000 cost Tools of Monetary Policy Federal Reserve---Central Bank Structure Board of Governors---Washington, D.C. Country divided into 12 districts Regional banks oversee activities of national and state chartered banks in area Elected to Board, one term of 14 years All board members, plus presidents of 5 regional reserve banks sit on FOMC—dictate policy Tools of Monetary Policy Easy-Money Policy Speed the growth of money supply As money goes into economy, interest rates drop and borrowing becomes cheaper and easier Loans are easier to get, so households and firms spend more; demand increases Tight-Money Policy Slow the growth of money supply Opposite is true, but does lead to drop in inflation rate Tools of Monetary Policy Most used: Open Market Operations Buying and selling of gov. securities in the bond market Think: Buy-Big; Sell-Small---Fed bond traders buy gov. securities, every dollar Fed pays for bonds increases the money supply; opposite is true Least used: The Reserve Requirement Adjust the ratio of money banks must hold on reserve Third tool: Discount Rate Banks borrow money from Fed; interest rate on those loans is the discount rate Board of Gov. controls this The Federal Funds Rate The Fed makes the news mostly over this FFR is the rate banks charge one another for very short loans NOT a monetary policy tool FOMC sets a target for the FFR based on view of economy; then uses open market operations to move FFR toward the target Interest rates on everything are affected by this Savings accounts, bonds, mortgages, credit cards What limits effectiveness? Fiscal and monetary policies are weakened by certain factors Time lags Misleading economic forecasts E.g, 2001 budget surplus, CBO predicted continued surplus through 2011, and by 2009 would be large enough to pay off national debt…..oops Concerns over national debt may limit gov. spending Foreign owned debt Burden on future generations Crowding out effect: Gov. borrowing increases interest rates so high that people do not borrow to invest in business
