Transcript United States Fiscal Policy 08

Warm-Up:
(1)What is debt?
(2) How does the government spend money
when they are in debt?
Making Fiscal Policy &
Monetary Policy
United States Fiscal Policy
• Fiscal policy is the federal government’s
use of taxing and spending to keep the
economy stable.
Important Definitions
Capital Deepening-process of increasing
the amount of capital per worker (p. 320)
Cost-Push Theory-theory that inflation
occurs when producers raise prices to meet
increased costs (p. 341)
Crowding-Out Effect-the loss of funds for
private investment due to government
borrowing (p. 406)
Market Basket-a representative collection
of goods and services (p. 339)
Federal Budget
A document written every year (fiscal
year) that projects government revenue
and authorizes where that money is
spent.
Congress writes the budget
The federal budget for FY 2009 is $3.1
trillion
The federal budget for FY 2010 is $3.6
trillion
The Budget Process
Federal agencies send requests for money to
the Office of Management and Budget.
*Congress
and the
White
House
work
togethe
r to
develop
a
federal
budget.
The Office of Management and Budget works with the
President to create a budget. In January or February, the
President sends this budget to Congress.
Congress makes changes to the budget and sends this
new budget to the President.
The President signs the
budget into law.
The President vetoes the
budget. If Congress cannot get
a 2⁄3 majority to override the
President’s veto, Congress
and the President must work
together to create a new,
compromise, budget.
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[edit] Summary
Surplus, Deficits, & Balance
A budget surplus occurs when revenues
exceed expenditures.
A budget deficit occurs when
expenditures exceed revenues.
A balanced budget occurs when revenues
are equal to spending.
Debt vs. Deficit
The difference between debt and
deficit:
The federal deficit is the amount that the
government owes from one fiscal year to
the next.
The national debt is the total amount the
government owes from all years.
• It is owed to people/business who own US
savings bonds, treasury bills, bank notes.
Responding to Budget Deficits
Creating Money
The government can
pay for budget
deficits by creating
money. Creating
money, however,
increases demand
for goods and
services and can
lead to inflation.
Borrowing Money
The government can
also pay for budget
deficits by borrowing
money.
The government
borrows money by
selling bonds, such as
United States Savings
Bonds, Treasury bonds,
Treasury bills, or
Treasury notes. The
government then pays
the bondholders back at
a later date.
The National Debt
The national debt is the total amount of money
the federal government owes. The national debt
is owed to anyone who holds U.S. Savings
Bonds or Treasury bills, bonds, or notes.
http://www.usdebtclock.org/
National
Debt
Graph:
Bush Sets 50-Year Record
Click
image
below
to enlarge.
Is the Debt a Problem?
Problems of a National Debt
To cover deficit spending the government sells
bonds. Every dollar spent on a government bond is
one fewer dollar that is available for businesses to
borrow and invest. This encroachment on
investment in the private sector is known as the
crowding-out effect.
The larger the national debt, the more interest the
government owes to bondholders. Dollars spent
paying interest on the debt cannot be spent on
anything else, such as defense, education, or health
care.
State of New York
GDP=$822 billion per year (11th largest
economy in the world)
NYS ranked fourth in the nation in attracting
new and expanded corporate facilities
(investment)
NYS ranked third in the nation for
international investment (behind Californai
and Texas)
NYS ranked 1st in the nation in the number of
Fortune 500 companies headquarters (54 in
NYS)
State of New York (Continued)
NYS is ranked 3rd in the nation for high
technology employment
NYS ranked 1st in the nation for number
of 1st tier universities
“the state could become the Silicon
Valley of nanotech” Forbes/Wolfe
Nanotech report (2003)
Monetary Policy & the
Federal Reserve System
What is Monetary Policy?
Actions that the Fed takes to influence
the level of real GDP and the rate of
inflation in the economy
What is the Fed?
Chairman Ben Bernanke
The Government’s Bank
Maintains the Treasury Department's checking
account, and clears checks
Reserve Board has great control because it has
power to regulate the money supply
As Regulators
Supervise and regulate the nation's banks to
ensure their financial soundness and are following
banking, consumer, and other laws.
As Lenders
• Provides credit to depository institutions
• Lender of last resort to the nation's banks
• If banks or other FDIC banks are forced to
close, depositors are protected by the FDIC
up to the legal limit of $250,000 per depositor
until January 2013.
•
99 banks have failed since September 2008.
•most critical role is to keep the economy
healthy through the proper application of
monetary policy
•to promote stable prices maximum
sustainable employment and steady
economic growth
Ticket-Out-the-Door:
Which areas of spending would you
increase and decrease?
As the economic situation improves
what can you expect to be the
situation with lending (less or more).