Transcript Economic Policy

Economic Policy
Fiscal policy - Taxing, spending, and
borrowing policies of the federal government.
Monetary policy – directed by The Federal
Reserve (The Fed); control the supply of
money; set interest rates.
Monetarism - the supply of money is the key to the
nation's health, and having too much cash and credit
in circulation stimulates inflation.
The Federal Reserve
Chairman – Janet Yellen (4 Year Terms) –
14 Governors (14 Year Terms) appointed by the
President; confirmed by the Senate.
 Independent Executive Agency with the
power to:




Set discount rates for the money that banks can borrow
from the Federal Reserve.
Set reserve requirements that determine the amount of
money that banks must keep in reserve at all times.
Buy and sell government securities in the market,
thereby either expanding or contracting the money
supply.
Ben Bernanke's Greatest Challenge - 60 Minutes - CBS News
Economic Review Terms



budget deficit A situation in which the government
spends more than it takes in, thus pumping more
money into the economy.
budget surplus A situation in which the government
takes in more money than it spends, thus draining
money out of the economy.
budget resolution A total budget ceiling and a ceiling
for each of several spending areas submitted by the
Budget Committees in the House and Senate to their
respective chambers. These resolutions serve as targets
to guide the work of each legislative committee as it
decides what should be spent in its area.
Economic Theory
Keynesianism A liberal economic theory
developed by English economist John Maynard
Keynes, who believed that economic health
depends on the proportions of income which are
saved and spent. The government's task is to
create the right level of demand. When demand
is too low, the government should pump money
into the economy through spending on its
programs. When demand is too great, the
government should take money out of the
economy by increasing taxes or cutting
spending.
Economic Theory
supply-side theory A conservative economic theory
that maintains that sharp tax cuts increase the incentive
for people to work, save, and invest. The greater
productivity of the economy stimulated by these
increased investments would produce more revenue for
the government despite the tax cut.
Reaganomics The economic program advocated by
economist Arthur Laffer and instituted by President
Ronald Reagan in 1981 which combined the theories of
monetarism, supply-side tax cuts, and domestic budget
cutting. The goal was to reduce the size of the federal
government, to stimulate economic growth, and to
increase American military strength.
Economic Theory
Monetarism. Monetarists such as Milton
Friedman hold that inflation is the result of too
much money chasing too few goods. This occurs
when government prints too much money. When
government tries to stop inflation by decreasing
the money supply, unemployment increases.
Rather than adopting these start-and-stop
policies, it would be better if government allowed
the money supply to increase steadily and
consistently at a rate about equal to the growth
in the productivity of the economy.
Iron Triangles
“Revolving Door”
What Drives Record Spending on Defense? : NPR
Factors that Drive Federal
Spending
Discretionary Spending – Defense,
Education, Homeland Security, Agriculture,
etc; interest groups keep this spending from
getting cut.
Mandatory Spending – Interest on the
debt, Pensions, Social Security, Medicare;
entitlements and other promises; also hard
to cut.
. . . To be continued.