Transcript 5/10/06 Warm Up

Drill 10/30
 How did the Chinese government
restrict trade with foreign
merchants
 How did this policy illustrate
their overall opinion of
foreigners?
 China forced trade in
only a few key ports
 China distrusted foreign
merchants due to
Confucian beliefs
Classical view
The government stays
out of the market’s way
The market fixes itself
Keynesian View
 The government
influences the market
through spending
 Increasing government
spending even if it
creates a deficit
Drill 10/30
Describe the Classical,
Keynesian and
Supply-side Economic
views
Supply-Side View
 The Government crafts
policy to increase supply
 lower taxes, especially
corporate taxes
Monetary & Fiscal
Policy
OR
What the #$%@ is
happening to my
#$^&%$ money?!
Drill 10/31
Define Fiscal +
Monetary Policy
Fiscal Policy
Federal government’s
use of taxation &
spending policies to
affect overall
business activity
Monetary Policy
Policy that involves
changing the rate of
growth of the supply of
money in circulation
The Federal Reserve
Nation’s central
banking organization;
regulates U.S.
monetary & financial
system
Structure of the Fed
The Board of Governors
The 12 District Banks
7 Member board, appointed
by the President (confirmed
by the senate) one 14 year
term
Almost 30,000 other member banks and
depository institutions
All nationally chartered banks are required
to join the fed system
Other banks have state-charters
Monetary Policy
Vocab
Reserve Requirements
 Banks required to keep percentage of
deposits on account w/ the Fed
 Prohibited from lending this out to
customers
Open Market Operations
 Fed buys & sells gov’t securities
to influence amount of cash in
circulation
Government Securities
 Financial instruments (i.e. bonds)
used by the federal gov’t to borrow
money.
 Gov’t securities are issued by the
U.S. Treasury to cover the federal
govt's budget deficit.
Interest Rate
 The price of funds expressed as a
percentage of the total amount loaned or
borrowed
 The cost of borrowing funds and the
payment received for lending
 Influenced by discount rate
Discount Rate
 Interest rate the Fed charges banks for
short-term loans of reserves
 Effects rates banks offer for loans &
savings
Why do all this
 What is the FED trying to
control?
ANNOUNCEMENT
 After much consideration
 Your test will be pushed back to
THURSDAY of next week
 It will be the first grade of the
second quarter
Drill 11/1
Define the three
types of Inflation
Inflation
 A general increase in prices
 Three types
 The Demand-Pull
 Limited quantity causes prices to go up
 The Cost-Push Theory
 Employers paying higher wages, costs go
up, employees demand higher wages
 The Quantity Theory
Quantity Theory
 There is too much money in
circulation
 So people are willing to pay more for
goods because they have more money
 Ideally money in circulation should
increase at the same rate as the
economy (real GDP)
The Money Supply
Controlling the money
supply controls the
economy and inflation
Money Supply
It includes
 Open Market Operations
 Manipulating Reserve
Requirements
 Manipulating Interest Rates
Money Creation
$1000 Deposit
$900 loan to another customer,
She gives it as a gift
That $900 is deposited
in another account
Reserve
Requirement
of 10%
$810 Loan to Yet ANOTHER customer
By the end of the line the money
supply has INCREASED by $2,710
$1000 + $900 + $810 = $2,710
Money multiplier
Effect
Increase in money supply =
initial cash deposit X 1/reserve requirement
Using the 10% from
the last example
what is the increase
of the money supply
after an initial
$1,000?
$10,000
Economic
Problem Solving
With a partner
 Read page 430 – 434
 Complete questions 1-6
 This will be collected
Summary
Which of the Fed’s
tools is the most
effective for
regulating the
economy and why?