Transcript American Government Unit Chapter 16: Financing Government

American Government Unit
Chapter 16: Financing Government
IV. Fiscal and Monetary Policy
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.
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Overall Economic Goals
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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
Fiscal Policy
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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
Monetary Policy
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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
3 tools of the Fed
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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?
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?
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