FOMC

GDP Review What is GDP how is it calculated? What does Keynesian economics have to do with fiscal policy? What are the two limitations of fiscal policy to create economic change? Policy during a recession? Read the section on the economic crisis of Outline the government’s response. What is the difference between fiscal and monetary policy?

GDP Review What is GDP how is it calculated? National consumption = National Income GDP = C (consumption)+I (investment) +G (government) +NX (Net Exports) What is Fiscal Policy, who sets it? ? Government Spending, Congress and the President What is Keynesian Fiscal Policy during a recession? Spend more government $$$ or cut taxes to attempt to keep GDP constant

Keynes Versus HayekKeynes Versus Hayek Round 1

Objectives Identify monetary policy tools available to the Federal Reserve System; describe the relationship between bank reserves, interest rates, and the economic goals of maximum employment and price stability; describe the key components of the Federal Reserve’s dual mandate; identify the ways in which monetary policy tools can be used to achieve economic objectives; and analyze policy strategies given economic conditions

The Fed Why is full-employment an important economic goal? (434) 5) Why are stable prices an important economic goal?

The Fed’s Toolbox What tools does the Federal Reserve System have at its disposal? The Fed’s Toolbox

Slide 1: Vocabulary Bank reserves – The sum of cash that banks hold in their vaults and the deposits they maintain with Federal Reserve Banks. Required reserves – Funds that a depository institution must hold in reserve against specified deposits as vault cash or deposits with Federal Reserve Banks. Excess reserves – The amount of funds held by a depository institution in its account at a Federal Reserve Bank in excess of its required reserve balance. Interest – The price of using someone else's money. Interest rate – The percentage of the amount of a loan that is charged for a loan. It is also the percentage paid on a savings account. The Fed’s Toolbox

What would happen if a bank wanted to make a loan but did not have enough excess reserves to do so?

Slide 2: Vocabulary Federal funds market – The market in which banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow from banks that have excess reserves. Federal funds rate – The interest rate at which a depository institution lends funds that are immediately available to another depository institution overnight. Federal Reserve System – The central bank system of the United States. Central bank – An institution that oversees and regulates the banking system and quantity of money in the economy. The Fed’s Toolbox

Slide 3: Monetary Policy Tools Monetary policy – The actions of a central bank to influence the cost and availability of money and credit to achieve the national economic goals. Discount rate – The interest rate charged by the Federal Reserve to banks for loans obtained through the Fed's discount window. Open market operations – The buying and selling of government securities through primary dealers by the Federal Reserve in order to control the money supply. Reserve requirements – Funds that banks must hold in cash, either in their vaults or on deposit at a Federal Reserve Bank. (last changed in 1992) Interest on reserves – Interest paid by Federal Reserve Banks on required and excess reserves held by banks at Federal Reserve Banks. The Fed’s Toolbox

Slide 6: Expansionary Policy Borrowing Increases Federal Reserve Primary Dealers Fed Buys Bonds Money Bonds Expansionary monetary policy – Actions taken by the Federal Reserve to increase the growth of the money supply and the amount of credit available. Banks Investors Bank Reserves Increase Interest Rates Decrease The Fed’s Toolbox

Questions What would happened to the level of reserves in the banking system if the Fed purchases government securities? What likely happens to interest rates when more excess reserves are available for loans in the banking system? How will consumers and businesses likely respond? How will producers respond?

Borrowing Decreases Federal Reserve Primary Dealers Fed Sells Bonds Money Bonds Banks Investors Bank Reserves Decrease Interest Rates Increase Contractionary monetary policy – Actions taken by the Federal Reserve to decrease the growth of the money supply and the amount of credit available. Slide 7: Contractionary Policy The Fed’s Toolbox

Dual mandate – The Federal Reserve’s responsibility to use monetary policy to promote maximum employment and price stability. Price stability – A low and stable rate of inflation maintained over an extended period of time. The Fed has a longer-run goal of 2 percent inflation. Maximum employment – The Fed does not have a specific unemployment target, but it does regularly publish its forecast for the longer-run rate of unemployment. Slide 8: Dual Mandate The Fed’s Toolbox

Questions Inflation Given the Fed’s ability to influence the level of reserves in the banking system, how do you think the Fed can provide price stability? Employment How do you think the Fed can influence employment?

Questions Does the Fed set the federal funds rate? How does the Fed influence the federal funds rate? Does the Fed set the discount rate, the rate banks pay to borrow reserves from the Fed? Is the discount rate usually higher or lower than the federal funds rate?

Interest Questions What would likely happen to the incentive for banks to lend money if the Federal reserve were to increase the interest rate it pays on reserves?

Headline: Unemployment Soars While Deflation Fears Grow What should the Fed do?

Headline: Prices Rising: Inflation Worries Grow What should the Fed do?

What is the name of the market in which banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow from banks that have excess reserves? a. The bank reserve market b. The federal funds market c. The excess reserves market d. The required reserves market

Last week the Second Bank of Middleville borrowed reserves from the Federal Reserve’s discount window. For the use of this money, the Second Bank of Middleville will now be required to pay which of the following rates? a. The reserve rate b. The discount rate c. The federal funds rate d. The monetary rate

Assume the Second Bank of Middleville has $100,000 in total deposits and has a required reserves ratio of 15 percent. How much does the Second Bank of Middleville have in excess reserves? a. $15,000 b. $85,000 c. $100,000 d. $150,000

If the Federal Reserve purchases a total of $50,000 in government securities through two different primary dealers, what will happen to the level of money/reserves in the banking system? a. Money/reserves will increase by $50,000. b. Money/reserves will increase by $100,000. c. Money/reserves will decrease by $50,000. d. Money/reserves will decrease by $100,000.

Social Policy What are the two main types of social policy? (Nuts and bolts) (449) How did the New Deal change our conception of social policy? What were some of the specific programs of the New Deal? ( ) What is the Great Society and what programs does it create? How is George Bush’s “ownership society” different philosophically from the typical thinking behind social policy? (450)

Social Policy What is Social Security? What are the problems with Social Security? What are some of the proposed solutions? ( ) What is the difference between Medicare and Medicaid? What are some of the issues with these programs? ( ) 19) List and Briefly describe the programs that provide income support. ( )

Government role Why is it difficult to measure the effectiveness of public policies in comparison with the private sector? ( ) What is the role of Congress in policy making? ( ) What is the role of the President in policy making? ( )

NPR on Monetary vs Fiscal Keynes Versus Hayek Round 2 Video Review on Monetary Versus Fiscal unemployment-raises-debate-on-optimal-rate unemployment-raises-debate-on-optimal-rate