Today’s Topic: Fiscal Policy What is fiscal policy? –The taxing and spending policies of our national government Who controls fiscal policy? –Congress (House and Senate) –President

What can be done with fiscal policy to increase GDP? –Increase government spending –Decrease taxes –Combination of both What can be done with fiscal policy to slowdown GDP growth? –Decrease government spending –Increase taxes –Combination of both

Monetary Policy What group controls it? –Federal Reserve System Controlled by a Board of Governors –Made up of 7 members –Serve 14 year terms –All but one has a Doctorate in Economics

What is the purpose of the FED? –Act as a central bank for all banks that are members –This group has strong influence on the money supply

How can the FED influence the nation’s money supply? –1. Buying and selling of government bonds If the FED wants to put money into the system they buy bonds If the FED wants to pull money out of the system they sell bonds

2. Adjust the “discount rate” –Rate at which FED loans member banks money –Prime Rate The rate the FED offers to its best customers –Prime Rate Plus The rate banks offer us

Federal Funds Rate –The rate the FED charges banks for “overnight” loans If the FED lowers rates.. –Encouraging people to spend If the FED raises rates… –Discouraging spending Slow down the growth

3. Adjust the “Reserve Ratio” –The amount of money banks must keep in reserve –This is a last resort Very seldom done If FED wants money in system –Lower ratio If FED wants money out –Raise ratio