Stabilizing the Economy

2. Stabilizing the Economy • Economic stability • A situation in which there is economic growth, rising national income, high unemployment, and steadiness in the general level of prices • Inflation • A rise in the general price levels of an economy • Recession • A short-term decline in the economy that occurs as investment sags, production falls off, and unemployment increases

3. Monetary Policy: Controlling the Money Supply • Monetary Policy • A form of government regulation in which the nation’s money supply and interest rates are controlled • Money • A system of exchange for goods and services that includes currency, coins and bank deposits • Federal Reserve: Board of Governors • A seven-member board that sets member banks’ reserve requirements, controls the discount rate, and makes other economic decisions

5. Monetary Policy: Controlling the Money Supply • Reserve requirements • Governmental requirements that a portion of member banks’ deposits must be retained to back loans made • Discount rate • The rate of interest at which member banks can borrow money from their regional Federal Reserve Bank • Open Market Operations • The buying and selling of government securities by the Federal Reserve Bank in the securities market

6. The FRB and the Executive and Legislative Branches • President shares responsibility for fiscal policy with Congress • Congress authorizes the FRB to make monetary policy • But there are many formal and informal contacts between the White House and the FRB

7. Fiscal Policy: Taxing and Spending • Fiscal policy: • Federal government policies on taxes, spending, and debt management • Intended to promote the nation’s macroeconomic goals, particularly with respect to employment, price stability, and growth • Keynesian theory • Discretionary fiscal policy: deliberate decisions by the president and Congress to run budget surpluses or deficits • John F. Kennedy first to apply fiscal policy theory • Revenue Act of 1964 • Reduced personal and corporate income tax rates • Tax cuts to stimulate the economy • Reagan in 1981 and G.W. Bush in 2001 and 2003

8. The Effects of Globalization • International economy • Increased competition benefits consumers • Expands the market for American products • Labor unions are strongest critics of free trade • Stress need to restrict “dumping” • Fair trade rather than free trade • Analysis suggests that globalization further segments the market into winners and losers. • Losers tend to be smaller businesses and workers.

9. The Budgetary Process • Federal government raises money from: • Individual income taxes • Social insurance • Retirement receipts • Corporate income taxes make up less than 10 percent of receipts • Most government spending goes toward: • National defense • Human resources

11. Congress and the Budgetary Process • Budget and Accounting Act of 1921 • Gave the president authority to prepare an annual budget and submit it to Congress • Staff agency now called the Office of Management and Budget was created to assist the president in this process • President sends budget proposal to Congress in January or February of each year • Congress and the appropriations committees actually provide the funding needed to carry out programs. • Budget and Impoundment Control Act of 1974

15. Major Budget Conflicts • 1980s • Conflict between Democrats in Congress who favored more domestic spending and less military spending versus • President Reagan’s administration who favored less domestic spending and more spending on defense • 1990s • Gingrich and the Republican Congress clashed with Clinton over which programs to cut in order to balance the budget.

17. Budget Initiatives of the G.W. Bush Administration • Economic Growth and Tax Relief Reconciliation Act of 2001 • Lowered income tax rates • Expanded deductions • Rebates • 2003 economy stagnant; another round of tax cuts • Cost of war • Budget deficit

18. The Budget Deficit and the Debt • Federal budget deficit • The amount by which federal expenditures exceed federal revenues • Gross domestic product (GDP) • The total market value of all goods and services produced in a country during a year • Deficit reduction legislation • Gramm-Rudman-Hollings Act of 1985 • Budget Enforcement Act of 1990 • Budget surplus 1998 • Budget deficit by 2003