Drill 10/30  How did the Chinese government restrict trade with foreign merchants  How did this policy illustrate their overall opinion of foreigners?

 China forced trade in only a few key ports  China distrusted foreign merchants due to Confucian beliefs

Classical view  The government stays out of the market’s way  The market fixes itself

Keynesian View  The government influences the market through spending  Increasing government spending even if it creates a deficit

Drill 10/30 Describe the Classical, Keynesian and Supply-side Economic views

Supply-Side View  The Government crafts policy to increase supply  lower taxes, especially corporate taxes

Monetary & Fiscal Policy

 OR What the is happening to my #$^&%$ money?!

Drill 10/31  Define Fiscal + Monetary Policy

Fiscal Policy  Federal government’s use of taxation & spending policies to affect overall business activity

Monetary Policy  Policy that involves changing the rate of growth of the supply of money in circulation

The Federal Reserve  Nation’s central banking organization; regulates U.S. monetary & financial system

Structure of the Fed The Board of Governors The 12 District Banks Almost 30,000 other member banks and depository institutions 7 Member board, appointed by the President (confirmed by the senate) one 14 year term All nationally chartered banks are required to join the fed system Other banks have state-charters

Monetary Policy Vocab

Reserve Requirements  Banks required to keep percentage of deposits on account w/ the Fed  Prohibited from lending this out to customers

Open Market Operations  Fed buys & sells gov’t securities to influence amount of cash in circulation

Government Securities  Financial instruments (i.e. bonds) used by the federal gov’t to borrow money.  Gov’t securities are issued by the U.S. Treasury to cover the federal govt's budget deficit.

Interest Rate  The price of funds expressed as a percentage of the total amount loaned or borrowed  The cost of borrowing funds and the payment received for lending  Influenced by discount rate

Discount Rate  Interest rate the Fed charges banks for short-term loans of reserves  Effects rates banks offer for loans & savings

Why do all this  What is the FED trying to control?

ANNOUNCEMENT  After much consideration  Your test will be pushed back to THURSDAY of next week  It will be the first grade of the second quarter

Drill 11/1  Define the three types of Inflation

Inflation  A general increase in prices  Three types  The Demand-Pull  Limited quantity causes prices to go up  The Cost-Push Theory  Employers paying higher wages, costs go up, employees demand higher wages  The Quantity Theory

Quantity Theory  There is too much money in circulation  So people are willing to pay more for goods because they have more money  Ideally money in circulation should increase at the same rate as the economy (real GDP)

The Money Supply  Controlling the money supply controls the economy and inflation

Money Supply  It includes  Open Market Operations  Manipulating Reserve Requirements  Manipulating Interest Rates

Money Creation $1000 Deposit $900 loan to another customer, She gives it as a gift That $900 is deposited in another account $810 Loan to Yet ANOTHER customer Reserve Requirement of 10% By the end of the line the money supply has INCREASED by $2,710 $ $900 + $810 = $2,710

Money multiplier Effect Increase in money supply = initial cash deposit X 1/reserve requirement Using the 10% from the last example what is the increase of the money supply after an initial $1,000? $10,000

Economic Problem Solving

With a partner  Read page 430 – 434  Complete questions 1-6  This will be collected

Summary  Which of the Fed’s tools is the most effective for regulating the economy and why?