MANAGING THE ECONOMY AND THE FED

THE BUSINESS CYCLE

The business cycle measures the Gross domestic Product of the U.S. That means all the goods and services produced in the U.S.

CHANGES IN THE GNP/GDP OVER 50 YEARS GREAT DEPRESSION

ECONOMY EXPANSION

A RECESSION IS WHEN THE GDP (GROSS DOMESTIC PRODUCT GOES DOWN FOR 6 MONTHS OR TWO QUARTERS

the change in the average price of a The Consumer Price Index Measures the change in the average price of a set number of products and services each month.

CONSUMER PRICE INDEX MEASURES INFLATION USING PRICES FOR THESE THINGS: http://www.nytimes.com/interactive/2008/05/03/business/20080403_SPENDING_GRAPHIC.html

WHEN PRICES CONTINUE TO GO UP OVER TIME IT IS CALLED INFLATION.

INFLATION IS THE RISE IN PRICES OF GOODS AND SERVICES OVER TIME.

DEFLATION: When the price of goods begins to Go down. This is bad because manufacturers receive Less for their product and lay people off.

STOCK INDEX ONE WAY TO MEASURE THE ECONOMY IS TO USE A STOCK INDEX...LIKE THE DOW JONES AVG.

THE MOST FAMOUS STOCK INDEXES ARE THE DOW JONES AND THE STANDARD AND POOR 500

HOW THE U.S. ECONOMY AND MONEY SUPPLY IS CONTROLLED

FISCAL POLICY Tax cuts for businesses or for individuals - This gives people and corporations more money, which may make them more likely to buy things, which increases demand. Increased spending to establish new government jobs - This increases demand for labor, which can lower the unemployment rate. Unemployment insurance - This system provides an income for people who are out of work.

THE FED Formally known as the Federal Reserve, the Fed monitors the U.S. economy. It is the central bank of the United States government. regulates banks manages the nation's money influences the economy

MONETARY POLICY: When the FED regulates the amount of money in the economy and how easy it is to get credit.

THE FED CONTROLS THE MONEY SUPPLY. THEY USE THE FOLLOWING MEANS: Lower the discount rate (interest on loans) Lower or raise the reserve requirement Buy or sell U.S. bonds to banks (open market policy)

The Reserve Requirement Banks now have to set aside a certain amount of cash in "reserve." The reserve is very important because it helps to ensure that the bank will always be able to give you your money when you ask for it.

The Discount Rate The "discount rate" is the interest rate that a regional Reserve Bank charges banks and financial institutions when they borrow funds.

WHEN THE GOVERNMENT KEEPS INTEREST RATES LOW (ALSO CALLED THE DISCOUNT RATE), IT IS CALLED LOOSE MONETARY POLICY

WHEN YOU RAISE THE DISCOUNT RATE/INTEREST RATE IT IS CALLED TIGHT MONEY.

Low interest allowed us to buy this house!!! LOW INTEREST RATES HELP THE ECONOMY

HIGH INTEREST RATES SLOW THE ECONOMY 9% 4% NO HOUSE!!!

Open Market Operations The most effective tool the Fed has, and the one it uses most often, is the buying and selling of government securities in its open market operations. Government securities include treasury bonds, notes, and bills. The Fed buys securities when it wants to increase the flow of money and credit, and sells securities when it wants to reduce the flow. http://money.howstuffworks.com/fed10.htm

SO… GOVERNMENT FISCAL POLICY: Raise or lower taxes Spend more government money Give unemployment FED MONETARY POLICY: Raise or lower discount rate (interest) Raise or lower Reserve Requirement Open Market bond sales

BANKS AND BANKING

THE BASIC FUNCTION OF MONEY IS TO STORE VALUE FOR FUTURE USE

MONEY HAS VALUE BECAUSE THE GOVERNMENT BACKS IT AND YOU BELIEVE IN THE GOVERNMENT

ANOTHER NAME FOR MONEY IS CURRENCY

THE FIRST BANKS BEGAN DURING THE MIDDLE AGES IN EUROPE

COMMERCIAL BANKS SUCH AS WACHOVIA

BANK SERVICES apply for a credit card buy traveler's checks cash a check check your account balance deposit money exchange money fill out a withdraw slip open a checking account open a savings account order checks pay off a loan pay your bills online rent a safety deposit box review your bank statement take out a loan talk with a bank teller talk with the bank manager transfer money use a debit card withdraw money

SAVINGS AND LOANS ARE BANKS THAT WERE ORIGINALLY STARTED TO HELP PEOPLE BUY HOUSES. TODAY, THEY DO MUCH OF WHAT A REGULAR BANK DOES. MANY WENT OUT OF BUSINESS IN THE SAVINGS AND LOAN CRISIS DURING THE 1980’S. THEY ARE OWNED BY SHAREHOLDERS.

CREDIT UNIONS BELONG TO PEOPLE WHO WORK FOR THE SAME COMPANY OR ORGANIZATION. THEY ARE OWNED BY THEIR MEMBERS. LOW INTEREST LOANS ARE AVAILABLE AND YOU CAN KEEP A CHECKING ACCOUNT.

SAVINGS ACCOUNTS Your money be placed in a bank savings account and this is guaranteed to be safe by the The FDIC (Federal Deposit Insurance Corporation). However,you get a very low interest rate and a low return on your money.

BANKS MAKE MOST OF THEIR MONEY FROM INTEREST ON LOANS

THE AMOUNT IN YOUR SAVINGS ACCOUNT IS CALLED THE PRINCIPAL.

BANKS HAVE LIMITED RESERVES (MONEY IN VAULT) BECAUSE THEY ARE ALWAYS LENDING IT OUT.

REVIEW OF INVESTING

CERTIFICATE OF DEPOSIT Money deposited in a bank or savings and loan for a stated time period and normally paying a fixed rate of interest.

Bonds are certificates of debt issued by government and corporations to people who lend them money. After a set amount of time, you get your money back with interest.

You can buy stock which is a part of a company. If the company Makes a profit you make a profit. You can’t lose more than the Amount you paid for the stock.

DIVIDENDS: If a company makes a profit, it splits the profit up and gives a certain percentage to each stockholder based on how much stock they own. CAPITAL GAINS is profit on stock sales.

MUTUAL FUNDS