Fiscal & Monetary Policy

1. Fiscal & Monetary Policy • How the Federal Government can • Influence the American Economy

2. Macroeconomics • Actions by the government using fiscal policy and monetary policy in an attempt to create and/or maintain steady economic growth Fiscal Policy: Government spending and tax policies Monetary Policy: Actions by the Federal Reserve Bank to regulate the nation’s money supply

3. To promote economic growth - the government will try to put more money in circulation • To keep the economy from growing too quickly (inflation) - the government will try to pull money out of circulation http://ak4.picdn.net/shutterstock/videos/2315960/preview /stock-footage-growing-economy-chart-animation.jpg

4. Money is any good that is widely accepted in exchange and in the repayment of debts Functions of Money Medium of Exchange it is accepted in exchange for goods and services Unit of Account Used to express values (That house is worth $500,000) Store of Value It maintains value over time (Can use it six month from now)

5. The Money Supply • M1: Currency, checking accounts and traveler’s checks • M2: Includes everything in M1 plus . . . savings accounts, money market funds for individuals and Certificates of Deposit (COD’s) under $100,000 — can’t be directly used to make an exchange (purchase) http://www.frbsf.org/education/files/MoneySupply_rev_2013-11-12_Page_5.png

6. The Federal Reserve System http://ltbl.tv/wordpress/wp-content/uploads/2012/11/fedlogo1.jpg • America’s Central Bank http://www.stlouisfed.org/inplainenglish/images/IPEImage_14.jpg

7. Federal Reserve Districts The Federal Reserve System was established in 1913 The U.S. is divided into 12 Federal Reserve districts •The Federal Open Market Committee (FOMC) is a major policy-making group within the Fed. •This 12-member board controls Open Market Operations - buying and selling government bonds http://2012books.lardbucket.org/books/macroeconomics-principles-v1.0/section_12/399493d30a708583abb5f4f027cfd028.jpg •The Board of Governors of the Federal Reserve System is the governing body of the Fed. •There are 7 Board members - each serves for 14 years

8. What does the Fed do? • Control the money supply • Supply the economy with paper money [printed at the Bureau of Engraving in Washington, D.C.] • Hold Bank Reserves • Provide check-clearing services • Supervise member banks http://selling2arizona.com/wp-content/uploads/2012/01/fed-miniutes.jpg • Serve as the lender of last-resort for banks having cash management problem

9. Bank Reserves All banks that are members of the Federal Reserve System are required to keep a reserve account at their local Fed bank - similar to a checking account for the bank Total Reserves - The amount of money in a banks’ reserve account plus the amount it has in its own vault http://www.munknee.com/wp-content/uploads/2013/04/Ways-to-make-money-1.jpg Total Reserves can be divided into two types: Required and Excess

10. Bank Reserves Required reserves - the minimum amount of money [reserves] that a bank must hold against its deposits as mandated by the Fed Reserve requirement - Regulation set by the Fed that requires a bank to keep a certain percentage of its deposits on-hand [in bank vault or with the Fed Excess Reserves - Any reserves held that are beyond the amount required by the Fed. Banks can use this money to make loans

11. By changing the reserve requirement, the Fed can increase or decrease the money supply Decreasing the Reserve Requirement means that banks have more money to lend out Increasing the Reserve Requirement means that banks have less money to lend out

12. Tools of the Federal Reserve Bank • •Reserve Requirements • •Open Market Operations • •Discount Rate http://www.stlouisfed.org/inplainenglish/images/IPEImage_16.jpg

13. Bank Reserves Reserve requirement - Regulation set by the Fed that requires a bank to keep a certain percentage of its deposits on-hand By changing the reserve requirement, the Fed can increase or decrease the money supply Decreasing the Reserve Requirement means that banks have more money to lend out Increasing the Reserve Requirement means that banks have less money to lend out

14. Open Market Operations The Federal Open Market Committee (FOMC) conducts open market operations by buying and selling government securities (bonds) Buying securities puts more money in circulation - helping the economy grow Selling securities takes money out of circulation - slowing the economy Goal: Bigger Economy - Buy Securities Goal: Smaller Economy - Sell Securities

15. The Discount Rate The Discount Rate is the interest rate the Fed charges a bank for a loan The Federal Funds Rate is the interest rate that one bank charges another bank for a loan http://huntingtonhomes.ocregister.com/files/2010/02/interest4.Med300.jpg Banks will borrow money from the least expensive source When banks borrow money from the Fed, the money supply increases When banks borrow money from each other, there is no change in the overall money supply

16. The Discount Rate To increase the money supply, the Fed lowers the discount rate Banks would be more likely to borrow money from the Fed To decrease the money supply, the Fed raises the discount rate http://www.optionpit.com/sites/optionpit.com/files/images/FederalReserve.jpeg Banks would be less likely to borrow money from the Fed

17. To promote economic growth - the government will try to put more money in circulation • To keep the economy from growing too quickly (inflation) - the government will try to pull money out of circulation http://ak4.picdn.net/shutterstock/videos/2315960/preview /stock-footage-growing-economy-chart-animation.jpg