LEQ: What is the role of the Government in the Economy? –Money –Monetary and Fiscal Policy –Economic Indicators (GDP)

What is Money?

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2 Types of Money Representative Money: represents and object of value for which it can be exchanged (silver/gold certificate).

Fiat Money: Money that is valuable because the government states that it is an acceptable means to pay debts.

$ Facts $ Currency, the coins and paper bills used as money in an economy. 3 Functions: –Medium of Exchange (alternative would be bartering actual goods and services) –Standard of Value (prices) –Store of Value (wealth) 6 Characteristics: –durability, portability, divisibility, uniformity, scarcity, and acceptability (generally accepted by all)

Banking Banking is a vital institution to the American economy. Typically, about half the nation’s money supply is in checking accounts (demand deposits) at a given time. Banks provide account services, security, and loans. Loans promote economic growth. Banks keep a percentage of demand deposits and use the rest for loans and investments. This is known as the fractional reserve principle.

So How does the Government impact the Economy?

Managing the Economy There are 2 main ways the U.S. government manages the economy: –Monetary Policy: regulation of the money supply by the Federal Reserve System. –Fiscal Policy: A government’s decisions about the amount of money it spends and the amount it collects in taxes (Fed. Budget).

Congress is to Fiscal Policy as the Federal Reserve is to Monetary Policy.

Monetary Policy Monetary Policy = Regulation of the money supply by the Federal Reserve System. One important way in which the federal government affects the macroeconomy is to regulate the banking industry and the nation’s money supply. The Federal Reserve (“the Fed”) was established in 1913 and served as the nation’s first true central bank.Federal Reserve It is divided into 12 Federal Reserve Districts.12 Federal Reserve Districts the Fed is ran by the Board of Governors (7). the Fed Basics,the Fed is known as “the bankers’ bank”the Fed Basics

The Fed (DC)

The Federal Reserve The Gov’s bank. Keeps federal government’s checking accounts (taxes). The gov. writes checks for highways etc. on Federal Reserve Bank accounts. Keeps track of gov. debts. the Fed keeps track of gov. bonds, bills, and notes (when it borrows money). Makes rules for banks. Also, clears checks. Provides currency to banks. the Fed makes loans (at discount rate) to banks when needed.

Regulating the Money Supply 3 Main Tools of the Fed (Monetary Policy): –Reserve Requirements (Req. Reserve approx. 10%) Why, Bank Closures during Great Depression –Discount Rate (can change interest rates) –Open Market Operations buying or selling gov. bonds to banks National Debt

Fiscal Policy A government’s decisions about the amount of money it spends and the amount it collects in taxes. –Obama’s Budget Proposal (The Federal Budget)Obama’s Budget Proposal –FDR New Deal –Stimulus Package (Recovery Act) –Bush Tax Cuts –Affordable Care Act –Government Shutdown

Gross Domestic Product (GDP) Economic Indicators: How is the economy doing? GDP is used consistently to measure national output by the United Nations and has replaced the GNP since GDP = The total dollar value of economy (measured by goods/services produced) within the country in a year. GDP Growth Rate is annual growth as a % GDP per capita = average salary per personGDP per capita U.S. GDP GDP Growth Rate

Other Indicators –Unemployment Rate (6.3%)Unemployment Rate –Inflation: a general rise in the prices of goods and services throughout the economy (too much $?).Inflation Inflation is measured by Consumer Price Index (CPI) Inflation Video Definition –For a healthy economy, spending must be approximately equal to the economy’s ability to produce goods and services (scarcity). –Too much money supply can lead to inflation. –Not enough money supply can lead to recession. –The Stock Market, DJIA, Etc.

Read about Zimbabwe nytimes article economist.com article

The 4 Sectors of GDP Personal Consumption Expenditures (C) Gross Investment (I) Government Purchases of goods and services (G) Net Exports (X-M) Output-expenditure model: C + I + G + (X-M) = GDP

Fluctuations in the Business Cycle Business cycles are changes, increases or decreases in real GDP, in a market system’s economic activity.Business cycles are changes, increases or decreases in real GDP, in a market system’s economic activity. Expansion (or recovery): increase in GDP.Expansion (or recovery): increase in GDP. Peak: highest point of productivity.Peak: highest point of productivity. Recession (or contraction):Recession (or contraction): A decline in GDP for two or more consecutive quarters (6 months +). Trough: lowest point of demand, employment, and production.Trough: lowest point of demand, employment, and production. Depression: is a prolonged and severe recession.Depression: is a prolonged and severe recession. gdp/gdp_glance.htmhttp:// gdp/gdp_glance.htm

??? How are GDP and Business Cycles related?

? Fiscal or Monetary Policy (Cartoons)

Questions How does the U.S. government manage the economy (2 main methods)? –What are examples of each??? How does the U.S. $ illustrate the role of government in the economy? How does the Government monitor how the economy is doing?

Resources treasury/Pages/default.aspxhttp:// treasury/Pages/default.aspx /default.htmhttp:// /default.htm Fun facts about the $2 Bill