Monetary and Fiscal Policy

Monetary and Fiscal Policy

Federal Reserve Bank•Central Bank for U.S•12 district banks•Regulates the banking industry•Tracks and manages the national monetary supply•Issues paper currency•Clears personal checks

Characteristics of moneyDurability = withstand wear and tearPortabilityDivisibility Uniformity = count and measure accuratelyLimited SupplyAcceptability

Money Creation

Banks earn a profit on money depositedBank lends part of deposited money and charges interest

Fiscal PolicyU.S. has an operating budget of about $1.7 – 2 TrillionFederal Budget

Document indicating the amount govt. expects to receive and spend in a yearFiscal year = Oct. 1 to Sept. 30

Office of Management and Budget (OMB) = prepares the federal budget

Expansionary Fiscal PolicyIncrease OutputTax Cuts

Encourage economy to expandIndividuals have more money to spendBusinesses keep more profitsIncrease demand, prices and output

Contraction Fiscal PolicyPurpose is to decrease outputRaise taxes

Individuals have less moneyFirms keep less of profitDecrease in spending, labor and capitalSlows GDP

Let’s not forget about OPECOrganization of Petroleum Exporting Countries1970’s embargo on oil shipped to U.S.

Oil prices increasedAmericans looked for ways to conserve energy

Monetary PolicyMonetary Policy : How much it restricts or releases the flow of money into the economy

Interest Rate : a % that determines how much money one must pay a lender in exchange for a loan (Good credit = better interest rates)

Federal Deposit Insurance CommissionAlso know as FDICCame after the Great Depression when many banks had to close after masses withdrew their moneyFDIC helps prevent mass withdrawals by assuring depositors that their money is insured by the government up to a certain amountThey have to keep a certain amount of money on hand in their bank. This is called the reserve requirement.

CreditDebit card : card that looks like a credit card, but serves the same function as writing a check, convenient way to access $Credit card : loans, paying interest on purchases at a later date (usually 30 days)Time deposits/Certificates of Deposits : putting money in an account for a certain amount of time and cannot withdraw it for that amount of time, while getting interest off of it while bank holds onto it.

PoliciesLoose Money Policy : Low reserve requirement, increases $ supply, because more people can borrow and spend $.

Tight Money Policy : High reserve requirement, limits the money supply