1. Ch. 18
ECONOMIC POLICY

2. Day 1
MONETARY POLICY

3. The central bank of the U.S.
It is the Federal Reserve System. For short: The Fed.
It is an independent government organization that is accountable to its member banks.

4. It is run by the Federal Reserve Board of Governors.
It’s leadership: 7 officers, each with 14 year terms.
The Chairman: Janet Yellen
Former Chairman: Alan Greenspan, a very powerful individual.
The system is divided into 12 districts.

5. What is the nature of its power?
It manages the flow of money in and out of the economy.

6. What are its significant responsibilities?
Clear checks.
Regulate banks.
Recommend consumer banking laws.
Maintain currency.
Use monetary policy to control money supply.

7. What is monetary policy?
The tools used by The Fed to make sure the right amount of money is in the economy.

8. When $ is put into the economy, then interest rates
Monetary policy
When $ is put into the economy, then interest rates
You hope to get more employment 
But you may also get inflation 

9. When $ is taken out of the economy, then interest rates
Monetary policy
When $ is taken out of the economy, then interest rates
You hope to get less inflation 
But you may also get unemployment 

10. It is to keep the economy stable!
What is their goal?
It is to keep the economy stable!

11. How the Fed uses monetary policy
Goal
More employment  (but more inflation )
Objective
PUT $$$ IN
The U.S. economy
$$$

12. Take $$$ out Using monetary policy Goal
Less inflation  (but more unemployment )
Objective
Take $$$ out
The U.S. economy
$$$

13. What are the three ways the Fed tries to do this?
Open Market Reserve Ratio Discount Rate

14. What are the three ways the Fed tries to do this?
Open Market Reserve Ratio Discount Rate
Buy
Government
Securities
Sell
$$ IN
$$ Out

15. Open Market Operations
The Fed BUYS Govt. securities from US to put $$$ into the Economy
The Fed SELLS Govt. securities to US to remove $$$ from the Economy

16. Buying and selling of government securities
$$$
The Fed
BUYS
Savings Bonds
The economy, where the people are!

17. Buying and selling of government securities
$$$
The Fed
SELLS
The economy, where the people are!
Savings Bonds

18. What are the three ways the Fed tries to do this?
Open Market Reserve Ratio Discount Rate
Buy
Government
Securities
Decrease
Sell
Increase

19. Reserve Ratio Fed has control over the reserves in its banks.
The reserve rate is the percent of deposits that cannot be loaned out.

20. What are the three ways the Fed tries to do this?
Open Market Reserve Ratio Discount Rate
Buy
Government
Securities
Decrease
Lower
Sell
Increase
Raise

21. Discount Rate The Fed determines the Discount Rate:
The rate the Fed charges on loans to its member bank.
When the Fed raises or lowers the discount rate, all other interest rates also increase or decrease in a direct relationship.
Consumer interest rates are usually several points higher than the discount rate.

22. If interest rates are higher, then fewer people will borrow money.
The idea is…
If interest rates are higher, then fewer people will borrow money.
Therefore there will be less money in the economy.

23. There will then be more money in the economy.
By the same rule…
If interest rates are lower, then more people will want to take out loans.
There will then be more money in the economy.

24. What are the three ways the Fed tries to do this?
Open Market Reserve Ratio Interest Rate
Buy
Government
Securities
Decrease
Lower
Sell
Increase
Raise
Put money in = Easy

25. What are the three ways the Fed tries to do this?
Open Market Reserve Ratio Interest Rate
Buy
Government
Securities
Decrease
Lower
Sell
Increase
Raise
Take money out--Tight

26. Easy (Expansionary) Monetary Policy
Buy securities
Reduce reserve ratio
Lower discount rate
Used when economy is sluggish (falling GDP)
Stimulates investment, expands production and employment
Can fuel inflation

27. Tight (Contractionary) Monetary Policy
Sell securities
Increase reserve ratio
Raise discount rate
Used when economy is overheated (rapidly increasing GDP and inflation)
Decrease investment and slow economic expansion
Can cause increase in unemployment

28. One other way the Fed may influence monetary policy is with…
“Moralsuasion”
When the Fed speaks, people listen! (Particularly people who manage $$$, especially if it’s their own!)

29. Assignment Begin working on Ch. 18 Study Guide by: Starting vocabulary
Answering questions #1-3 from today’s lecture

30. Day 2
FISCAL POLICY

31. But Mr. Armstrong, what can the Government do to stabilize the economy ?
The Government sets Fiscal Policy
Government’s decisions about government spending (G) & taxing to stabilize the economy to:
Increasing output (GDP)
Decrease unemployment
Reducing inflation

32. What can the government do to stabilize the economy?
The President can propose fiscal policy BUT
Congress must approve all government spending and all tax rates

33. Supply-side policies production
Cut taxes and government regulations to
incentives for business & individuals
Businesses invest and expand, creating jobs; people work harder, save and spend more
investment and productivity lead to output
With output , the economy grows and unemployment goes down

34. Supply-side Fiscal Policy
“Trickle-down” theory
If you lower corporate taxes and/or give corporation government subsidies this will
create more jobs for ordinary citizens
who then benefit indirectly from a fiscal policy that benefits corporations

35. Demand-side Policy
Stimulates demand for goods & services to spur output
Cut taxes or increase federal spending
( “G” in GDP) to put money into people’s hands
With more money, people buy more
Businesses output to meet growing demand
With output , the economy grows and unemployment goes down

36. Easy (Expansionary) Fiscal Policy
Used when economy is faced with recession, high levels of unemployment and slow growth in GDP
Stimulates the economy
Increased government spending (increase “G”)
Lower taxes
A combination of the two

37. Tight (Contractionary) Fiscal Policy
Used when growth is overheated (demand for workers (by firms) or goods (by consumers)
Decreased government spending (decrease “G”)
Increased taxes
A combination of the two

38. Assignment
Finish Ch. 18 Study Guide