Transcript Chapter 27

Sponge: Friday, March 2

1.
Write questions and correct answers:
A factory worker who loses their job
because some new machines can do it
faster are facing what type of
unemployment?
a.
b.
c.
d.
2.
Seasonal
Frictional
Cyclical
Structural
A worker gets laid off b/c his employer had to
cut 3,000 jobs nationwide due to a recession.
What kind of unemployment is that? (choose
from a-d above)
Sponge: Monday, March 5
1.
2.



What are three ways in which you benefit
from government spending?
See p. 324 in your textbook to understand
and define Gross National Product
Macro unit test on Thursday
To study for the test, read chapter 3 in the
orange EOCT book and answer questions on
pages 65, 69, and 70-72
DUE THURSDAY
Tutorial today after school and Tues-Thurs
7:30-8:00 a.m.
SSEMA3 The student will explain how
the government uses fiscal policy to
promote price stability, full
employment, and economic growth.
a. Define fiscal policy.
b. Explain the government’s taxing and
spending decisions.
Fiscal Policy

Fiscal policy: How government taxing
and spending policy can be used to
influence the macroeconomy.

Fiscal policy is used by Congress (and
approved or vetoed by the President)
Fiscal Policy: When is it used?
Contractionary Fiscal Policy: A decrease
in government spending and/or an increase
in taxes designed to decrease aggregate
demand in the economy and control inflation
 Expansionary Fiscal Policy: An increase
in government spending and/or a decrease
in taxes designed to increase aggregate
demand in the economy, thus increasing
real output and decreasing unemployment.

SSEMA3 The student will explain how
the government uses fiscal policy to
promote price stability, full
employment, and economic growth.
 a. Define fiscal policy.
 b. Explain the government’s taxing and
spending decisions.

SSEMA2 The student will explain the role and
functions of the Federal Reserve System.
a. Describe the organization of the Federal Reserve
System.
b. Define monetary policy.
c. Describe how the Federal Reserve uses the tools of
monetary policy to promote price stability, full
employment, and economic growth.
The Federal Reserve

The Federal Reserve (“Fed”) serves as
the nation’s central bank, which is
designed to oversee the banking system
and regulate the quantity of money in
the economy.

The Fed is a privately owned institution,
authorized in 1914 by Congress to
ensure the health of the nation’s banking
system.
Fed’s Organization: 4 Parts
1.
The Fed is run by its Board of Governors:
 Seven members appointed by the President of
the United States.
 The Chairman of the Board is the most important
position: presiding, directing, and testifying about
Fed policy. She/He is appointed by the President.
Fed’s Organization: 4 Parts
2. Federal Open-Market Committee (FOMC)
FOMC sets and directs U.S. monetary policy
3. 12 regional Federal Reserve Banks
4.
Member banks
Three Primary Functions of the Fed
1. Regulate the private banking industry to make
sure banks follow federal laws intended to
promote safe and sound banking practices.
2. Act as a banker’s bank, making loans to other
banks and as a lender of last resort.
3. Control of the supply of money, i.e. Monetary
Policy.
Monetary Policy: Definition

The actions of a central bank that
determine the size and rate of growth of
the money supply, which in turn affects
interest rates. Monetary policy is
maintained through actions such as
increasing the interest rate, or changing
the amount of money banks need to keep
in the vault (bank reserves).
Sponge: Tuesday, March 6
1.
2.


What is the largest sector of the macroeconomy-C, I, G or (X-M)?
Someone who wants lower taxes and less
government spending is (a) fiscally liberal or (b)
fiscally conservative?
Macro unit test will be this Thursday, March 8
Due Thursday: Read chapter 3 in orange EOCT
book and answer all questions in the chapter
(including those at the end) as a review for test
 Write out the question AND the correct answer (not
just the letter)

No Current event due this week, but I will accept
make-ups
Sponge: Wednesday, March 7



With a group of 3-4 students, prepare a
chart like the one on page 411 and fill in
the squares to show the impact that the
Fed’s monetary policies have on the
money supply, the economy and you.
Macro unit test TOMORROW!
Due TOMORROW: Read chapter 3 in
orange EOCT book and answer all
questions in the chapter (including those
at the end) as a review for test
 Write out the question AND the correct
answer (not just the letter)
SSEMA2 The student will explain the role
and functions of the Federal Reserve
System.
a. Describe the organization of the Federal
Reserve System.
b. Define monetary policy.
c. Describe how the Federal Reserve uses
the tools of monetary policy to promote price
stability, full employment, and economic
growth.
Goals of Monetary Policy
Full
Employment
Stable Prices
Sustainable
Economic Growth
The Fed’s Key Tools of Monetary Policy

Discount Rate (DR)
 The interest rate charged by the Federal
Reserve to banks that borrow on a short-term
(usually overnight) basis

Reserve Requirements (RR)
 The amount of money banks must keep on
reserve at the Fed

Open Market Operations (OMO)
 Buying and selling Treasury securities between
the Fed and selected financial institutions in the
open market
 Most important tool; directed by the FOMC
DR. RROMO
Remember
DR.
RROMO!!
Fed Monetary Policies: OMO

Open-Market Operations: The primary way in
which the Fed changes the money supply is
through the purchase and sale of U.S.
government bonds.
Fed Monetary Policies: OMO
 To
increase the money supply, the Fed
buys outstanding government bonds from
the public.
 Effects of buying bonds:
1. This puts money back into the hands of
people and businesses who can then spend
it in the marketplace
2. Causes interest rates to drop and spending
to increase
 Therefore, OMO purchases are
expansionary
Fed Monetary Policies: OMO
 To
decrease the money supply, the Fed
sells government bonds to the public.
 Money that is saved is not spent in the
marketplace
 Remember that bonds and other Treasury
bills are a way for the government to borrow
money
 Bonds and other government securities are a
safe way for people and institutions to save
Therefore, OMO sales are contractionary
Enhance your notes
With a partner, read the description of
OMO in the textbook on pages 403 to
404
 What can you add to your notes about
OMO?

Quick Quiz!

How does the Fed
increase the supply
of money in the
economy?
Monetary Policy: Reserve Requirements

The supply of money in the economy is affected
by the amount of deposits that is kept in banks as
reserves and the amount that is lent out.

The Fed sets banks’ reserve requirements
Bank “T-Account” Example
First National Bank
Assets
Reserves
$10.00
Liabilities
Deposits
$100.00
Loans
$90.00
Total Assets
$100.00
Total Liabilities
$100.00
Bank “T-Account” Example
First National Bank
Assets
Reserves
$10.00
Liabilities
Deposits
$100.00
Loans
$90.00
Total Assets
$100.00
Total Liabilities
$100.00
A “T-Account”
illustrates the
financial position of
a bank that accepts
deposits, keeps a
portion as reserves
and lends out the
rest.
Impact of Changes of RR

If the Fed increases the reserve requirement, it
decreases amount of money in circulation in the
economy
 With a higher RR, banks have less money to lend
 This is called a “tight” money policy

Lowering the RR pumps more money into the
economy b/c banks have more to lend
 This is an “easy” money policy
Enhance your notes
With a partner, read the description of
RR in the textbook on page 403
 What can you add to your notes about
RR?

Monetary Policy: Discount Rate
THE BASICS:
 Discount rate = the interest rate that
banks and other financial institutions pay
the Fed in order to borrow money


Interest rate = a percentage that a
lender charges a borrower in exchange
for a loan
Monetary Policy: Discount Rate
THE BASICS:
 Discount Rate (DR)

 Applies to short-term loans made directly to
commercial banks from the Federal Reserve
System.

The higher the DR charged by the Fed, the
higher the interest rate banks must charge
borrowers in order to still make money
Monetary Policy: Discount Rate
 IN
PRACTICE:
 Higher interest rates (via higher DR)
encourage people to save, rather than
borrow and spend
 People would rather earn high interest on their savings
than pay high interest on borrowed money
 Therefore, the money supply decreases
 Lower
interest rates (via lower DR) results
in more loans, causing money supply to
increase and therefore spending to increase
Effects of Low Interest Rates

Generally, low interest rates
stimulate the economy
because there is more
money available to lend.
 Consumers buy cars and
houses.
 Businesses expand, buy
equipment, etc.

Why does the Fed lower
interest rates?
 If inflation is in check, lower
rates stimulate economic
activity, thus boosting
economic growth.
Effects of High Interest Rates

The Fed raises interest rates
as an effective way to fight
inflation.
 Inflation—a sustained rise in
the general price level; that
is, all prices are rising
together.


Consumers pay more to
borrow money, dampening
spending.
Businesses have difficulty
borrowing; unemployment
rises.
Enhance your notes
With a partner, read the description of
DR in the textbook on page 404
 What can you add to your notes about
DR?

Tools of Monetary Control
The Fed has three instruments of monetary
control:
 Open-Market Operations:
 Buying and selling bonds.

Changing the Reserve Ratio:
 Increasing or decreasing the ratio.

Changing the Discount Rate:
 The interest rate the Fed charges other banks for
loans.
Remember
DR.
RROMO!!
Work Period: Tuesday, March 6
Finish double-bubble comparing fiscal
policy and monetary policy
 With a group of 3-4 students, prepare a
chart like the one on page 411 and fill in
the squares to show the impact that the
Fed’s monetary policies have on the
money supply, the economy and you.
 Closing @ 9:20: Review standard breakdown sheet

Review







What are the three main roles of the
Federal Reserve System?
Where is your Fed?
What are the goals of monetary
policy?
What happens when the Fed lowers
interest rates? Raises interest rates?
What is inflation? Why should it
concern you?
What is the name of the Fed’s
monetary policymaking body?
What is the discount rate?
Sponge: Thursday, March 8
Who is this
handsome
gentleman
and what
does he
stand for?