1. Monetary Policy 17.3 Federal Reserve System Tools of Monetary Policy
Economic stability isn't just about fiscal policy. Monetary policy helps stabilize the economy by regulating the nation's supply of money and influencing interest rates. Most monetary policy is handled by the Federal Reserve System, or the Fed, as it's known. In this section we will talk about the Fed and the tools it uses in regulating the money supply.

2. Federal Reserve System
17.3
Federal Reserve System
Structure
Federal Reserve Board
Federal Open Market Committee
12 Federal Reserve Banks
Other member banks
Board of Governors
Dual Mandate
Control inflation
Limit unemployment
In 2013, the Federal Reserve System will celebrated its 100th anniversary. The Fed is made up of the Federal Reserve Board, the Federal Open Market Committee, 12 federal reserve banks, member banks and the Board of Governors.
The Fed operates under a dual mandate: to control inflation and to limit unemployment. Sometime those two missions can conflict with each other. Government stimulation to increase employment levels, for example, can lead to inflation and higher prices for goods and services. The Fed has responded to economic crises with monetary policy tools to increase employment in the short term, only to have to deal with debt and inflation later.

3. Tools of Monetary Policy
17.3
Tools of Monetary Policy
Open market operations
Buying and selling of government securities, or debt
Discount rate
Rate of interest at which it lends money to member banks
Reserve requirements
Designate the portion of deposits that member banks must retain on hand
So, how does the Fed regulate the money supply? It has three key tools to do its job. The first is open market operations, which are the buying and selling of government securities. When banks buy long-term government bonds, they make payments to the Fed, which reduces the amount of money available for loans. On the other hand, banks have more money available to loan to businesses and individuals when the Fed buys the securities back.
The second key tool the Fed uses is the discount rate, which is the rate of interest at which the Fed lends money to member banks. Lowering the discount rate encourages banks to lend more money, which can expand the economy.
The Fed can also adjust the reserve requirements, which is the portion of deposits that member banks must retain on hand. The more banks must keep on hand, the less they have available for lending.

4. 17.3 FIGURE 17.3 How Does the Federal Reserve System Work?
In making appointments to the Federal Reserve Board, the president is required by law to provide balanced representation of geographic, financial, agricultural, industrial, and commercial interests.
Source: Board of Governors of the Federal Reserve System.

5. 17.3 How Has the Government Responded to the Recession?
President Obama appointed Richard Cordray in 2012 to serve as Director of the new Consumer Finance Protection Bureau. The new agency is charged with assisting consumers in understanding financial products and services, including mortgages and credit cards.
Saul Loeb/Getty Images

6. 17.3 This monetary policy tool can
shrink or expand the money supply through the buying and selling of government debt
Dual mandate
Discount rate
Reserve requirements
Open market operations
None of the above
Monetary policy is complex. Let's see what you have retained from this section.

7. 17.3 This monetary policy tool can
shrink or expand the money supply through the buying and selling of government debt
Dual mandate
Discount rate
Reserve requirements
Open market operations
None of the above
Open market operations involve the buying and selling of government debt to expand or shrink the money supply available for lending.

8. Income Security Policy
17.4
Income Security Policy
The Foundations of Income Security Policy
Income Security Programs Today
Income security programs protect people against loss of income that can come from retirement, disability, unemployment, or death. Economists call these programs "automatic stabilizers" because if the economy enters a recession, income security programs can expand the economy automatically by providing people with money for rent, food, and other needs. Those purchases go right back into the economy. After the economy recovers, then government spending on income security programs goes back down.
In this section, we will look at how these programs started and what they look like today.

9. The Foundations of Income Security Policy
17.4
The Foundations of Income Security Policy
Franklin D. Roosevelt and the New Deal
Civil Works Administration (CWA)
Works Progress Administration (WPA)
Social Security Program
It probably comes as no surprise that our income security policy has it roots in Franklin D. Roosevelt's New Deal. Faced with massive unemployment during the Great Depression, Roosevelt created the Civil Works Administration, or CWA, which put people to work building public works projects. At its height, the CWA employed more than 4 million workers.
Roosevelt also created the Works Progress Administration, or WPA, in 1935 after the CWA was disbanded. The WPA paid workers a small salary to construct or improve more than 20,000 playgrounds, schools, hospitals, and airfields.
But perhaps the most well known of the income security programs—and the longest lasting—is the Social Security program, which was created in 1935 to provide assistance to the elderly and disabled.

10. Income Security Programs Today
17.4
Income Security Programs Today
Old Age, Survivors, and Disability Insurance
Unemployment Insurance
Supplemental Security Income
Family and Child Support
Supplemental Nutrition Assistance Program
There are two types of income security programs: entitlement and means-tested programs. Entitlement programs are government benefits that all citizens who meet eligibility requirements are entitled to receive. Spending on these programs is mandatory. Non-means-tested programs provide cash assistance to qualified beneficiaries, regardless of income. Social Security is an example of a non-means- tested program. Means-tested programs require people to have incomes below a certain level to receive benefits. Food stamps are an example of this type of program.
Old age, survivors, and disability insurance, or Social Security as we call it, is our major income security program. People pay into the system during their working lives, and then draw payments once they reach the minimum retirement age.
Unemployment insurance, which is funded through payroll taxes, pays benefits to people who have lost their jobs through no fault of their own. Supplemental Security Income provides support to qualified people with disabilities.
Family and child support, which at one point was commonly called welfare, has undergone significant changes since the 1990s and now has more restrictions. The supplemental nutrition program, also known as food stamps, was originally part of a program to expand demand for American agricultural products.

11. 17.4
TABLE How Many Americans Benefit from Income Security Programs?
Table 17.1 shows us how many Americans receive the different forms of income security benefits we just discussed. No surprise, more Americans receive Social Security benefits than any other income security program.
Sources: Social Security Administration, Center on Budget and Policy Priorities, .org/; Department of Health and Human Services, Food Research Action Center, Veterans' Affairs, Bureau of Labor Statistics,

12. 17.4 Should Social Security be Privatized?
Social Security privatization has been a hot-button issue. Here, members of Congress speak at a rally opposing privatization.
Michael Kleinfeld/UPI/Landov

13. 17.4 FIGURE 17.4 How Do State Unemployment Rates Vary?
In July, 2012, the national unemployment rate was 8.2 percent. However, this rate varied tremendously across the country, with the highest levels in the South and West, and the lowest levels in the Midwest.
Source: United States Department of Labor,

14. 17.4 When citizens qualify for an
income security program regardless
of income, that program is:
Non-means tested
Means-tested
Both of the above
None of the above
Let's see what you have learned about the federal income security programs that we have discussed.

15. 17.4 When citizens qualify for an
income security program regardless
of income, that program is:
Non-means tested
Means-tested
Both of the above
None of the above
Programs that provide benefits regardless of income level, such as Social Security, are non-means tested.

16. Toward Reform: Recession and Economic Recovery
17.5
Toward Reform: Recession and Economic Recovery
Fiscal Policy
Monetary Policy
Income Security Policy
Evaluating the Government's Response
In 2008, the United States entered a severe recession. As we discussed earlier, the government used fiscal policy to respond to the recession by providing both a $168- billion stimulus package and a $700-billion bailout package for the financial industry. When those didn't fully succeed, another $787-billion stimulus package was added.
The government also responded to the recession by using monetary policy. The Federal Reserve Board lowered interest rates, engaged in open market operations, and lowered the discount rate to encourage economic activity. Even now the Fed continues to keep interest rates low.
Finally, the government responded to the recession using income security policy. Increased demand for programs like food stamps and unemployment benefits, however, has put a strain on state governments, which receive a fixed block grant from the federal government to administer those programs.
Did the government succeed in responding to the crisis? It's hard to say, given the different approaches taken early in the recession by the Republican administration of President George W. Bush and later by the Democratic administration of President Barack Obama. Economists say we will have to wait until the economy further strengthens before we can say if the tax-cutting economic policies of Bush or the government-spending economic policies of Obama were more effective.

17. 17.5
17.5 The government's use of stimulus packages in response to the recession falls under which economic policy?
Fiscal policy
Income security policy
Monetary policy
None of the above
Please answer one final multiple-choice question for the chapter, about the economic stimulus legislation.

18. 17.5
17.5 The government's use of stimulus packages in response to the recession falls under which economic policy?
Fiscal policy
Income security policy
Monetary policy
None of the above
Stimulus packages fall under fiscal policy.

19. 17
Discussion Questions
What types of income security policies does the United States currently have? What is the debt ceiling and why has raising it suddenly become a contentious political issue?

20. 17 Further Review Listen to the Chapter
Study and Review the Flashcards
Study and Review the Practice Tests