LEQ: What is the role of the Government in the Economy? –Money –Monetary and Fiscal Policy –Economic Indicators (GDP)

LEQ:

• What is the role of the Government in the Economy?– Money– Monetary and Fiscal Policy– Economic Indicators (GDP)

What is Money?

Learn about more currency denominations

2 Types of Money

• Representative Money: represents and object of value for which it can be exchanged (silver/gold certificate).

• Fiat Money: Money that is valuable because the government states that it is an acceptable means to pay debts.

$ Facts $

• Currency, the coins and paper bills used as money in an economy.

• 3 Functions:– Medium of Exchange (alternative would be bartering

actual goods and services)– Standard of Value (prices)– Store of Value (wealth)

• 6 Characteristics:– durability, portability, divisibility, uniformity, scarcity,

and acceptability (generally accepted by all)

So How does the Government impact the Economy?

Managing the Economy

• There are 2 main ways the U.S. government manages the economy:– Monetary Policy: regulation of the money

supply by the Federal Reserve System.

– Fiscal Policy: A government’s decisions about the amount of money it spends and the amount it collects in taxes (Fed. Budget).

Congress is to Fiscal Policy as the Federal Reserve is to Monetary Policy.

Monetary Policy• Monetary Policy = Regulation of the money

supply by the Federal Reserve System.• One important way in which the federal

government affects the macroeconomy is to regulate the banking industry and the nation’s money supply.

• The Federal Reserve (“the Fed”) was established in 1913 and served as the nation’s first true central bank.

• It is divided into 12 Federal Reserve Districts.• the Fed is ran by the Board of Governors (7).• the Fed Basics,the Fed is known as “the banker

s’ bank”

The Fed (DC)

The Federal Reserve

• The Gov’s bank. Keeps federal government’s checking accounts (taxes).

• The gov. writes checks for highways etc. on Federal Reserve Bank accounts.

• Keeps track of gov. debts.• the Fed keeps track of gov. bonds, bills, and

notes (when it borrows money).• Makes rules for banks. Also, clears checks.• Provides currency to banks.• the Fed makes loans (at discount rate) to banks

when needed.

Regulating the Money Supply

• 3 Main Tools of the Fed (Monetary Policy):– Reserve Requirements

• (Req. Reserve approx. 10%)• Why, Bank Closures during Great Depression

– Discount Rate (can change interest rates)– Open Market Operations

• buying or selling gov. bonds to banks• National Debt

Fiscal Policy

• A government’s decisions about the amount of money it spends and the amount it collects in taxes.– Obama’s Budget Proposal (The Federal Budget)– FDR New Deal– Stimulus Package (Recovery Act)– Bush Tax Cuts– Affordable Care Act– Government Shutdown

Gross Domestic Product (GDP)

• Economic Indicators: How is the economy doing?• GDP is used consistently to measure national output by

the United Nations and has replaced the GNP since 1991.

• GDP = The total dollar value of economy (measured by goods/services produced) within the country in a year.

• GDP Growth Rate is annual growth as a %• GDP per capita = average salary per person• U.S. GDP• GDP Growth Rate

Other Indicators– Unemployment Rate (6.3%)

– Inflation: a general rise in the prices of goods and services throughout the economy (too much $?).

• Inflation is measured by Consumer Price Index (CPI)• Inflation Video Definition

– For a healthy economy, spending must be approximately equal to the economy’s ability to produce goods and services (scarcity).

– Too much money supply can lead to inflation.– Not enough money supply can lead to recession.

– The Stock Market, DJIA, Etc.

Read about Zimbabwe

• nytimes article

• http://www.cato.org/zimbabwe

• economist.com article

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Fiscal or Monetary Policy (Cartoons)

Questions

• How does the U.S. government manage the economy (2 main methods)?– What are examples of each???

• How does the U.S. $ illustrate the role of government in the economy?

• How does the Government monitor how the economy is doing?

Resources

• http://www.treasury.gov/about/role-of-treasury/Pages/default.aspx

• http://www.federalreserve.gov/aboutthefed/default.htm

• Fun facts about the $2 Bill