[ 12.2 ] Fiscal and Monetary Policy [ 12.2 ] Fiscal and Monetary - PowerPoint PPT Presentation

[ 12.2 ] Fiscal and Monetary Policy

[ 12.2 ] Fiscal and Monetary Policy Learning Objectives • Explain the major responsibilities of the Federal Government for domestic economic policy. • Describe the overall goals of the Federal Government's actions in the economy. • Explain how government fiscal policy influences the economy at the national level. • Explain how government monetary policy influences the economy at the national level.

[ 12.2 ] Fiscal and Monetary Policy Key Terms • gross domestic product • inflation • deflation • recession • Fiscal policy • John Maynard Keynes • Monetary policy • open market operations • reserve requirement • discount rate • Interest

[ 12.2 ] Fiscal and Monetary Policy • Fiscal Policy: various means the government uses to raise and spend money. • Monetary Policy: process through which the government can influence the nation’s economy through changes in the money supply and the availability of credit.

[ 12.2 ] Fiscal and Monetary Policy Federal Government and the Domestic Economy • The Federal Government’s fiscal, monetary, and regulatory policies influence the economy at the national, state, and local levels. • In addition to fostering competition and entrepreneurship, both the executive and legislative branches help set fiscal and monetary policy. • Despite the prominence of executive agencies (OSHA, SEC, etc.) it is important to note that the government must continually balance the call for regulation with the equally critical demand for limited government involvement in the nation’s economic life.

The Federal Government and the Domestic Economy - For the first 120 years or so of its existence, the Federal Government played only a very limited role in the economy — whether at the local, State, or national level — and in the economic well- being of the American people. However, beginning in the early twentieth century, there were repeated economic “panics” and recessions. - In the picture above, crowds gather at New York City’s American Union Bank during a 1931 run on the bank. The Great Depression led to New Deal legislation that greatly increased the government’s role in banking.

The Federal Government and the Domestic Economy • The Federal Reserve System (The Fed). [1913] • Federal Funds Rate: an interest rate at which banks lend money to other banks on a daily basis. • Raising interest rates makes money more expensive to borrow and CONTRACTS the economy. • Lowering interest rates makes money less expensive to borrow and EXPANDS the economy. • The Securities and Exchange Commission (SEC) [1934] • Oversee the nation’s stock markets. • Ensures corporations do not engage in such abuses as insider trading. • Ensures publicly traded companies truthfully disclose their finances. • Brings court actions against those who violate securities laws. • The Department of Labor [1913] • Occupational Safety and Health Administration (OSHA) [1971] • Employment Standards Administration (ESA) [1971] • Bureau of Labor Statistics (unemployment rate and consumer price index) • Supporters: Rules and regulations are important to the protection of American workers. • Detractors: They are overly burdensome to business owners and regulations should be scaled back to better allow free enterprise to operate.

The Federal Government and the Domestic Economy Decisions made by the Fed have great impact on both the national and global economy. Analyze Maps What is the benefit of having regional banks as part of the decision-making process?

[ 12.2 ] Fiscal and Monetary Policy Key Goals for the Economy • The Federal Government seeks to achieve 3 key goals in the economic realm. • Full Employment • Unemployment would equal 0% • Unemployment rate as of November 1, 2019 was 3.6% • Why would the unemployment rate rise when the economy improves? • Price Stability • Limit inflation and deflation • Economic Growth • Gross Domestic Product continually increases.

Key Goals for the Economy James Carville was the lead strategist for Bill Clinton's 1992 presidential campaign. Carville’s strategy recognized that voters were most concerned with the economy in that election year.

Key Goals for the Economy As part of its attempt to control the GDP, the Federal Government watches the unemployment rate. Analyze Graphs From 2010 to 2013, was the GDP expanding or shrinking? How do you know?

[ 12.2 ] Fiscal and Monetary Policy How Fiscal Policy Influences the Economy - Fiscal policy is a major tool with which both the executive and legislative branches of the Federal Government seek to achieve broad economic goals. - Fiscal policy consists of the government’s powers to tax and spend to influence the economy. - The President, aided by agencies such as the Council of Economic Advisors, often makes specific recommendations with regard to the economy, while the legislative branch enacts laws to put fiscal policies into action. The executive branch then carries out those laws through its various executive departments and independent agencies.

[ 12.2 ] Fiscal and Monetary Policy How Monetary Policy Influences the Economy - Monetary policy is another means by which the legislative and executive branches of the Federal Government can influence the nation’s economy. - Monetary policy involves the money supply (the amount of currency in circulation) and the availability of credit in the economy.

How Monetary Policy Influences the Economy The Fed has a variety of tools at its disposal to influence the nation's economy. Analyze Charts Which of these strategies might produce the quickest results?

How Fiscal Policy Influences the Economy President Obama signs the American Recovery and Reinvestment Act in 2009. At the time, he noted that 'Our American story is . . . about converting crisis into opportunity. . . .'

[ 12.2 ] Fiscal and Monetary Policy How Monetary Policy Influences the Economy - Open Market Operations: a process that involves the buying and selling of government’s securities, such as bonds, from and to the nation’s banks. - Reserve Requirements: the amount of money that the Federal Reserve Board determines banks must keep “in reserve” in their vaults or on deposit with one of the 12 Federal Reserve Banks. - Discount Rate: the rate of interest a bank must pay when it borrows money from a Federal Reserve Bank.

How Monetary Policy Influences the Economy According to this cartoon, the Fed has the same response to most situations. What effect should lowering interest rates have on the economy?

Quiz: The Federal Government and the Domestic Economy Suppose the current federal funds rate is 5 percent, and the Federal Reserve changes it to 4.5 percent. In theory, why might this help the economy grow? A. People will be less likely to borrow money, which will grow the economy. B. The amount of credit in the economy will decrease. C. Money will be less expensive, so more companies will borrow and invest. D. Lower interest rates usually lead to lower prices.

Quiz: Key Goals for the Economy If the economy is not growing, one reasonable conclusion would be that A. federal spending should be cut. B. the economy is in the midst of a recession. C. taxes should be raised. D. full employment has been achieved.

Quiz: How Fiscal Policy Influences the Economy How do tax increases slow economic growth? A. When federal taxes increase, so do State and local taxes. B. People get paid much less for the work they do. C. The government can't spend all the money it collects in taxes. D. People have less money to spend in the economy.

Quiz: How Monetary Policy Influences the Economy What happens when the Federal Reserve lowers the discount rate? A. The government spends less money to help to boost the economy. B. Banks incur more interest which they must repay to the Federal Reserve. C. Banks will raise their interest rates, leading customers to borrow less. D. Banks can lower their interest rates, enticing customers to borrow more.

[ 12.3 ] Financing Government

[ 12.3 ] Financing Government Learning Objectives • Explain how the Constitution gives Congress the power to tax and at the same time places limits on that power, as well as, how government taxation and regulation can serve as restrictions to private enterprise. • Identify the sources of revenue of the U.S. government today, including both tax and non-tax revenues.

[ 12.3 ] Financing Government Key Terms • progressive tax • payroll taxes • regressive taxes • excise tax • estate tax • inheritance tax • gift tax • Customs duties

The Power to Tax This text is mostly about fiscal policy — a subject that has a tendency to make most people’s eyes glaze over. It is, nonetheless, a matter of very considerable importance to everyone in the United States.

[ 12.3 ] Financing Government The Power to Tax Article 1-Section. 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States…