Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Real bills doctrine wikipedia , lookup
Business cycle wikipedia , lookup
Fractional-reserve banking wikipedia , lookup
Non-monetary economy wikipedia , lookup
Early 1980s recession wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Monetary policy wikipedia , lookup
Quantitative easing wikipedia , lookup
Interest rate wikipedia , lookup
FISCAL AND MONETARY POLICY How do policymakers use fiscal and monetary policy to stabilize the US economy? What are the Origins of Modern Fiscal and Monetary Policy? Objective: keep the economy running smoothly – Fiscal policy: the government’s power to tax and spend – Monetary policy: the Federal Reserve’s power to regulate the money supply and interest rates – Impact of John Maynard Keynes Prior to Great Depression – Laissez Faire Deficit spending – fight Depression/Recession Milton Friedman: control money supply key to stabilizing economy – Monetarism: money policy to contract or expand money supply Tools of Fiscal Policy to Stabilize the Economy Expansionary fiscal policy tools – Increased government spending – Tax cuts Contractionary fiscal policy tools – Decreased government spending – Tax increases * Role of automatic stabilizers Tools for Monetary Policy to Stabilize the Economy The Federal Reserve uses monetary policy by managing the money supply and interest rates – Easy-money policy Expansionary policy that speeds the growth of the money supply to prevent recession (decline in the GDP) – Tight-money policy Contractionary policy that slows the growth of the money supply to prevent inflation *Most common tool of Federal Reserve is open-market operations (buying and selling of government securities). The “Feds” Open-Market Operations: the most used tool Buying and selling of government “securities” in the bond market – Treasury bonds, notes, bills, or other government bonds (guaranteed by US gov. and tax exempt) – Recommendation by FOMC (Federal Open Market Committee), component of the Fed Foreign exchange rates, interest rates, and growth of the money supply Other Tools of the Fed Least used tool: The Reserve Requirement – Reserve requirement for banks –”required reserve ratio” Minimum percent of deposit keep in reserve at all times – Lowering the ratio allows for more loans and thus more money in circulation vs. raising, which tightens money supply – Average reserve requirement, 3-10% The Discount Rate: – Banks borrowing money from Fed to maintain their reserve requirement Interest rate is set by Fed at a discount for Banks – Low interest rate means more money to loan = more money in circulation – High interest rate = less money to loan, less money in circulation – Between 1990-2008, from 7% to 0.75% – Borrowing from the Fed can signal problems with the bank, last resort Federal Funds Rate Rate that banks change each other for very short – as in overnight – loans – Loans common between banks to maintain the reserve requirement – NOT a monetary policy tool because between private banks, not government – FOMC sets “federal fund rate” as ceiling for interest rates Affects rate for credit cards, saving accounts, mortgages Factors that Limit Effectiveness of Fiscal and Monetary Policy Time Lags – Compilation of data – “Multiplier Effect” Inaccurate Forecasts – Economic models: PPF and Supply and Demand Graphs – CBO (Congressional Budget Office) Largest Concern: The National Debt John Maynard Keynes = Deficit Spending – Emergencies only Fear of Government Bankruptcy – Increase taxes, refinance debt Sell new bonds to pay off old bonds Burden on Future Generations – Individuals and Institutions pay interest Holders of government bonds benefit Foreign-owned Debt – Japan and China Interest paid to foreign countries but they buy US goods with it Offset by Americans buying foreign bonds Crowding-out Effect – Crowding private borrowers out of the lending market Interest rate so high, no one can afford a loan Government borrowing raises interest rates but spend the money on creating jobs