ECONOMIC POLICY

MONEY MONEY MONEY

MONEY!!!

GOVERNMENT ECONOMIC POLICY

1. MONETARY POLICY1. CONTROLLED BY THE FEDERAL

RESERVE 2. MAINTAIN STABILITY OF OUR

CURRENCY

2. FISCAL POLICY1. SPENDING AND TAXING BY

GOVERNMENT2. THE BUDGET IS THE GREATEST TOOL

MONETARY POLICY

• CONTROLLED BY THE FEDERAL RESERVE – BOARD OF GOVERNORS APPOINTED BY

THE PRESIDENT, APPROVED BY THE SENATE(14 YEAR TERMS)

– CHAIRMAN OF THE FEDERAL RESERVE POWERFUL IN SETTING MONETARY POLICY(4 YEAR TERM)

• THE FED ACTS AS THE BANK’S BANK

MONETARY POLICY

• THREE TOOLS OF THE FEDERAL RESERVE– DISCOUNT RATES– RESERVE REQUIREMENTS– SECURITIES

• TWO TYPES OF MONETARY POLICY– TIGHT – EASY

TIGHT MONEY FOLLOWED DURING HIGH INFLATION TIMES

EASY MONEY FOLLOWED DURING ECONOMIC SLOWDOWNS

Increase reserve requirements

Decrease reserve requirements

Increase interest rates Decrease interest rates

Sell securities Buy securities

FISCAL POLICY

• POLICIES OF TAXING AND SPENDING BY THE GOVERNMENT

• PROBLEM IS MAJORITARIAN POLITICS WANTS BEST OF BOTH– LOW TAXES; LESS DEBT; INCREASED

SERVICES WHICH REQUIRES SPENDING

ECONOMIC THEORIES

• MONETARISM– INFLATION OCCURS WHEN TOO MUCH

MONEY CHASES TOO FEW GOODS(FRIEDMAN)

– INCREASE MONEY SUPPLY AT SAME RATE OF GROWTH

ECONOMIC THEORIES

• KEYNESIANISM– GOVERNMENT SHOULD CREATE THE

RIGHT LEVEL OF DEMAND– GOV’T SPEND WHEN DEMAND IS LOW;

TAKE MONEY OUT THROUGH TAXES AND CUTS WHEN DEMAND IS TOO HIGH

• FDR AND NEW DEAL– PRIME THE PUMP; DEFICIT SPENDING

ECONOMIC THEORIES

• SUPPLY SIDE ECONOMICS– LESS GOVERNMENT INVOLVEMENT– LOWER TAXES WILL LEAD TO

INVESTMENTS BY THE PRIVATE SECTOR THEREBY INCREASING REVENUE FOR THE GOVERNMENT

• REAGONOMICS WAS MOSTLY THIS WITH INCREASED MILITARY SPENDING

MACHINERY OF ECONOMIC POLICY

• COUNCIL OF ECONOMIC ADVISORS• OFFICE OF MANAGEMENT AND

BUDGET(OMB)• TREASURY DEPARTMENT (SECRETARY IN

PARTICULAR)• THE FEDERAL RESERVE • CONGRESS-MOST IMPORTANT

– APPROVES ALL TAXES AND SPENDING– HAS AUTHORIZATION, APPROPRIATION, AND

OVERSIGHT POWERS OVER OTHER TOOLS

DESIRES OF VOTERS CAUSE PROBLEMS FOR POLICY

• POLITICIANS LOOK TO – REDUCE SPENDING TO MANAGE

DEBT/DEFICIT– LOOK TO SUPPORT VOTERS’ FAVORITE

PROGRAMS

• FORMS OF TAXES– PROGRESSIVE TAXES

• THE MORE ONE MAKES, THE MORE ONE PAYS IN TAXES.• A HIGHER PERCENTAGE IS CHARGED FOR THOSE THAT

MAKE THE MOST MONEY• FEDERAL AND STATE INCOME TAXES ARE PROGRESSIVE

– REGRESSIVE TAXES• PEOPLE PAY THE SAME DOLLAR AMOUNT • IT COMES TO HIGHER PERCENTAGE FOR THE LOWER

INCOME INDIVIDUALS.• IT HURTS THE LOWER INCOME INDIVIDUALS MORE• SALES TAXES ARE AN EXAMPLE OF REGRESSIVE TAXES

– THE SAME TAX ON A CAR HURTS MR. ADAMS MORE THAN MICHAEL JORDAN. WHY? MR. ADAMS MAKES A LOT LESS THAT JORDAN.

– PROPORTIONAL TAXES• CHARGES THE SAME PERCENTAGE OF INCOME

REGARDLESS OF INCOME• ALSO KNOWN AS A FLAT TAX

– EVERYBODY PAYS A CERTAIN PERCENTAGE OF THEIR INCOME TO TAXES

BUDGET PROCESS

• OMB• BUDGET CEILINGS• APPROPRIATIONS• CONGRESSIONAL ACTION• DISCRETIONARY VS. MANDATORY

SPENDING– DISCRETIONARY IS ONLY 1/3 OF THE BUDGET– MANDATORY IS 2/3; ENTITLEMENTS, SOCIAL

SECURITY

BUDGET REFORM

• BALANCED BUDGET ACT 1985– FOUND LOOPHOLES

• “PAY AS YOU GO” APPROACH