The Budget Process

I. Fiscal Policy Managing the economy by adjusting the governments budget.

II. The Budget The budget process involves both the President and Congress. a. The primary decisions are related to taxes, spending and borrowing. How might divided government cause problems?

2. The Fiscal Year Each house must pass a budget that includes 13* major appropriations. If these bills are not passed, Congress must then pass emergency spending legislation, called a continuing resolution (CR) or the government shuts down.

3. Taxes/Revenue The US has a progressive tax system. Individual income taxes are biggest source of income.

4. Spending 2/3 of the of the federal budget is mandatory spending. 1. This includes paying the debt and entitlement programs such as social security. B. 1/3 of the budget is discretionary. ½ of discretionary spending goes to defense The rest goes to everything else. 3. It is difficult to control spending without reducing the cost of entitlement spending.

President Obama’s proposal for fiscal year 2015.

Warm Up Review the following with your partner Describe fiscal and monetary policy. Who is in charge of each? What is mandatory spending? What is included in mandatory spending. What is discretionary spending? How much of the budget is discretionary? How much of discretionary is usually spent on the military?

Fiscal Ship Reflection 1) What was most challenging about meeting your goals?

II. Monetary Policy A. The Federal Reserve (FED) was created in 1913 to control monetary policy. 1. The FED is truly an independent agency. Neither Congress or the President directly control the FED. The agency funds itself through interest on loans it gives out.

B. Adjusting Interest Rates 1. The Fed will raise interest rates when they want to discourage spending. -Usually during times of inflation or excessive demand. 2. The FED will lower interest rates when they want to encourage spending. -Usually during times of recession

C. Controlling the Money Supply Open Market Operations- Buying and Selling of government securities (Bonds) A. When the Fed buys bonds it puts more money into circulation. B. When the Fed sells bonds it withdrawals money from the economy.

3. Setting interest rates is not simply a matter of managing the economy but a political one rewarding some groups at the expense of others.

2. Reserve requirements- The Fed also sets the reserve rates that banks must hold on deposits. a. In other words the FED tells banks how much money they can loan out and how much they must keep in reserve.

Review What is Monetary Policy? Name the Three ways the FED controls Monetary Policy. https://www.youtube.com/watch?v=_WS1cQTiin4