Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like...

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Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing consumer spending RECESSION A loss of GDP for at least 6 months. (Less individual spending & higher unemployment)

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Transcript of Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like...

Page 1: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Government & the U. S. Economy

What does the government do to keep the U.S. economy from acting like a roller coaster:

INFLATION rising prices &

increasing consumer spending

RECESSION A loss of GDP for at

least 6 months.(Less individual

spending & higher unemployment)

Page 2: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

The government tries to control the economy with two different

types of policies1. Fiscal policy - decisions made by the federal government (Congress & President) regarding how much money to spend and how much to collect in taxes

2. Monetary policy - decisions made by a central bank (Federal Reserve) about the amount of money in circulation and interest rates

Page 3: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Imagine that the U.S.

economy is like a campfire.

Page 4: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

If the campfire gets too

small, the fire goes out

and that’s bad!

Page 5: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

If the U.S. economy slows down and

shrinks, we have a recession that could lead to an economic

depression.

Page 6: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

So what does the government do to

try to keep the economy stable?

Page 7: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

If the economy slows too much, the

government would increase the amount of money in circulation to

stimulate economic growth.

If the fire is low, you would add sticks and logs to make the fire

grow larger.

This is called Expansionary Policy. Government is trying to expand the economy.

Page 8: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

The government tries to stimulate the economy with fiscal policy:

1. Congress can lower taxes so that business and individuals have more money to spend.

2. The government can increase the amount of money it spends.

Page 9: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

The Fed tries to stimulate the economy with monetary policy:

1. They can buy securities to increase the amount of money banks have on hand.

2. The Fed can lower interest rates to make it easier for individuals and business to borrow money.

3. The Fed can lower the reserve requirement to allow banks to lend out more money.

Page 10: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

If the campfire gets too big, that’s bad!

Back to the campfire…

Page 11: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

If the economy grows too

large, we have high prices and

inflation.

Page 12: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

If the economy grows too rapidly, the

government would decrease the amount of money in circulation to slow economic growth.

If the fire became too big, you could remove

some sticks and logs to make the fire slow down.

This is called Contractionary Policy. Government is trying to slow the economy.

Page 13: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

The government tries to slow down inflation with fiscal policy:

1. Congress can raise taxes so that businesses and individuals have less money to spend.

2. The government can decrease the amount of money it spends in the economy.

Page 14: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

The Fed tries to slow down inflation with monetary policy:

1. They can sell securities to decrease the amount of money banks have on hand.

2. The Fed can raise the discount rate to make it cost more for individuals and business to borrow money.

3. The Fed can raise the reserve requirement to force banks to keep more money and lend less.

Page 15: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

The Federal Reserve System

Page 16: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

The Federal ReserveStarted in 1913 is

response to yet another financial crisis

Is Quasi-publicServes three purposes

Regulates the payment system

Supervises banksConducts monetary

policy

Washington D.C.

Page 17: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Federal Reserve FunctionsIssue currencySet reserve requirementsLend money to banks Collect checksAct as a fiscal agent for U.S. government

Supervise banksControl the money supply

LO4 14-17

Page 18: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

THE FEDERAL RESERVE SYSTEM

BOARD OF GOVERNORS

SEVEN MEMBERS APPOINTED BY THE PRESIDENT OF THE UNITED STATES (AND APPROVED BY THE SENATE)

14 YEAR STAGGERED TERMS

(Chairman appointed from the Board and serves a four-year term. Can be re-appointed)

OPEN MARKET COMMITTEE FEDERAL ADVISORY BOARD

7 Governors plus the President of the NY Fed 12 members, one nominated from each and 4 regional Presidents who serve on a regional Federal Reserve Bank

rotating basis. 12 REGIONAL FEDERAL RESERVE BANKS

25 BRANCH BANKS FOR THE 12 REGIONS

FINANCIAL INSTITUTIONS

Janet Yellen

Page 19: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

LO3

The 12 Federal Reserve Banks

14-19

Page 20: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

More than one-third of U.S. commercial banks are members of the Federal Reserve System.

National banks chartered by the federal government are, by law, members of the

Federal Reserve System.

Page 21: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

State-chartered banks may choose to become members of the Federal Reserve System if they meet

the standards set by the Board of Governors.

Page 22: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

10 Fun Facts About the Fed

http://www.bankrate.com/finance/federal-reserve/fun-federal-reserve-facts-1.aspx
http://www.bankrate.com/finance/federal-reserve/fun-federal-reserve-facts-1.aspx
Page 23: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Monetary Policy and the Federal Reserve

Monetary policy involves decisions the Fed makes to affect the nation’s money supply and credit.

Goals

* Economic growth

* Full employment

* Stable pricesFederal Reserve Bank of Richmond

Page 24: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Open Market OperationsThink back to our inflation activity where you bought candy.

The process of buying and selling Treasury securities is called open market operations.This is done by the Federal Open Market Committee (FOMC)

The Federal Reserve doesn’t keep a stockpile of candy. The candy represents Treasury securities – US Govt. treasury bills & bonds.

Page 25: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

How else does the Fed keep prices stable and maintain economic growth?• Discount Rate – (Interest rates) • The Fed does not “set” the interest rate that

most people pay. It sets a discount rate that it charges to banks for short-term loans, which then contributes to the rate that the banks charge customers on their loans.

– Lower interest rates = more banks making loans which creates money.

– Higher interest rates = less loans, less money

Page 26: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.
Page 27: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

How else does the Fed keep prices stable and maintain economic growth?

•Reserve RequirementsReserve requirements are the amount of funds that a

depository institution (bank, credit union,…) must hold in

reserve against specified deposit liabilities. Within limits

specified by law, the Board of Governors has sole authority

over changes in reserve requirements.

Depository institutions must hold reserves in the form of

vault cash or deposits with Federal Reserve Banks.

Page 28: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.
Page 29: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.
Page 30: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Your Turn!!!

If the country is in a recession,

the government might _______ taxes so

that there is ______ money available for

businesses and individuals.

lower

more

Page 31: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Your Turn!!!

If the country is experiencing high

inflation, the Federal Reserve might _____

interest rates causing banks to lend

__________ which leaves less money

available for

______________________________.

raise

less money

businesses & individuals to borrow

Page 32: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Your Turn!!!

The country is in a bad recession and many people are out of work.

The government might _________ its spending so that there is ______ money

in the economy.

increasemore

How would this help create new jobs?

Page 33: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Your Turn!!!

The government recognizes a problem with the economy and decides to start selling

more bonds to the public.

Will this action increase or decrease the amount of money in the economy? Why?

Does this show the country experiencing inflation or a recession?

How do you know?

Page 34: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Your Turn!!!What message is the cartoonist is trying to convey?

Page 35: Government & the U. S. Economy What does the government do to keep the U.S. economy from acting like a roller coaster: INFLATION rising prices & increasing.

Memorandum from the Chairman of the Board of Governors

To: Federal Reserve Board of GovernorsRe: Current Economic Problems

I have received the following economic data and would appreciate your recommendations for policy regarding monetary policy.

Unemployment Rate Inflation RateLast Year 6.2% 2.6%This Year 8.5% 2.5%Forecast for Next Year 9.6% 2.3%

1. Given the information in the table, what is the major economicproblem confronting the U.S. economy?

2. Please summarize your suggested changes for monetary policy.


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