American Government Unit Chapter 16: Financing Government

1. American Government Unit Chapter 16: Financing Government IV. Fiscal and Monetary Policy

2. Objectives • Describe the overall goals of the Federal Government’s actions in the economy. • Explain the features and purposes of fiscal policy. • Explain the features and purposes of monetary policy.

3. Overall Economic Goals • Gross domestic product (GDP): the total value of all final goods and services produced in the country each year. • Goals of the Federal Government in the economy – full employment, price stability, and economic growth • Full employment – enough jobs for people who want them • Price stability – stable long-term growth of the economy – small inflation or deflation • Inflation – general increase in all prices • Deflation – general decrease in all prices (can’t pay off loans) • Recession – absence of growth and shrinking of the economy

4. Fiscal Policy • Fiscal Policy – the governments powers to tax and spend to influence the economy. • To grow economy – you need to put more money into the economy – deficit spend or lower taxes • To dampen economy (Why?) – balance budgets and raise taxes • Free enterprise says government shouldn’t do anything – Great Depression • Keynesianism – says government deficit spend to stimulate economy – Bush (2008) and Obama (2009) • Not real fast moving

5. Monetary Policy • Monetary Policy – policy the FED can influence the economy by adjusting the amount of currency or money supply in the economy by the use of credit • Federal Reserve System (1913) – the Fed – 7 members picked by president for 14 years works independently of Congress is the nations central bank. • Created to stop Panics – when depositors lose confidence in banks and take out all money (bank run) • Fed is a source of emergency funding for banks • 3 tools

6. 3 tools of the Fed • Open market operations – the buying and selling of government bonds to banks • If the Fed sells bonds – lessen or dampen the money supply, if they buy bonds back – economy grows • Reserve Requirements – amount of money banks must have on hand (10%). • If the Fed raises RR – economy is dampened, if Fed lowers RR – economy grows • Discount Rate – interest rate banks must pay if they borrow money from the Fed. • If DR is raised – economy is dampened (more expensive). If DR is lowered – economy grows (cheaper) • Excel example?

7. Review • What are the principal economic goals of the Federal Government? • What methods are used by the government to meet these goals? • Should the government be involved in the economy? Why or Why not? • What are some tools of Monetary policy?