Macroeconomics:Macroeconomics:Understanding the Difference Understanding the Difference
between Fiscal Policy and between Fiscal Policy and Monetary Policy Monetary Policy
SSEMA2SSEMA2
Students will explain the role and function of Students will explain the role and function of the Federal Reserve System the Federal Reserve System
Fiscal PolicyFiscal Policy Fiscal Policy-Fiscal Policy- refers to governments taxing and spending refers to governments taxing and spending
policy, and how it affects the economy.policy, and how it affects the economy.
1. Expansionary Fiscal Policy (BAD TIMES)- 1. Expansionary Fiscal Policy (BAD TIMES)- government government spends more money on goods and services- spends more money on goods and services- hopefully hopefully leads to more jobsleads to more jobs
a. Cut Taxes-a. Cut Taxes- lower taxes puts more money in lower taxes puts more money in consumers hands to spend and invest.consumers hands to spend and invest.b. Disposable Income-b. Disposable Income- the income earned the income earned
minus minus taxes can only spend what’s availabletaxes can only spend what’s availablec. Savings-c. Savings- unspent money unspent money
2. Contractionary Policy (GOOD TIMES)-2. Contractionary Policy (GOOD TIMES)- government government spends less, leads to slower GDP growth.spends less, leads to slower GDP growth.
a. Raise Taxes-a. Raise Taxes- raising taxes reduces income raising taxes reduces income for businesses and consumers, slows GDP.for businesses and consumers, slows GDP.
How Taxes WorkHow Taxes Work Taxes-Taxes- used by the federal government to pay for services and used by the federal government to pay for services and
goods for Americansgoods for Americans1. 1. Tax base-Tax base- is the income, property, good, or service is the income, property, good, or service that is that is
subject to a tax.subject to a tax.
Three Types of TaxesThree Types of Taxes1. 1. Proportional tax-Proportional tax- is a tax for which the percentage of is a tax for which the percentage of
income paid in taxes remains the same for all income income paid in taxes remains the same for all income levels. levels. (SALES TAX)(SALES TAX)
2. 2. Progressive tax-Progressive tax- is a tax for which the percent of is a tax for which the percent of income paid in taxes increases as income increases. income paid in taxes increases as income increases. (INCOME (INCOME TAX)TAX)
3. 3. Regressive taxRegressive tax- is a tax for which the percentage of - is a tax for which the percentage of income paid in taxes decreases as income increases.income paid in taxes decreases as income increases.
(SOCIAL SECURITY/MEDICARE)(SOCIAL SECURITY/MEDICARE)
Impact of Fiscal PoliciesImpact of Fiscal Policies Limits to Fiscal Policy-Limits to Fiscal Policy-
1. 1. Difficulty of Changing Spending-Difficulty of Changing Spending- small part of the small part of the budgetbudget
2. 2. Predicting the Future-Predicting the Future- nobody understands the nobody understands the economy and its hard to react at the right timeeconomy and its hard to react at the right time
33. Delayed Results-. Delayed Results- takes time for change to be felt takes time for change to be felt
44. Political Pressure-. Political Pressure- Voters put pressure on Voters put pressure on representatives to reduce taxes and cut representatives to reduce taxes and cut spending spending
5. 5. Government Coordination-Government Coordination- the different branches the different branches and and services need to work together to implement good services need to work together to implement good fiscal fiscal policies (IMPOSSIBLE)policies (IMPOSSIBLE)
The Federal Budget The Federal Budget Budget Surplus-Budget Surplus- when the government taxes exceed when the government taxes exceed
government expenditures (costs).government expenditures (costs).
Balanced Budget-Balanced Budget- when taxes collected equal to government when taxes collected equal to government expenditures.expenditures.
Budget Deficit-Budget Deficit- When the government collects less taxes than When the government collects less taxes than its spends.its spends.
National DebtNational Debt How does a government pay for Budget Deficits?How does a government pay for Budget Deficits?
1. Borrow-1. Borrow- government borrows money to pay for the government borrows money to pay for the deficit. deficit.
2. Sells:2. Sells: Government Securities known as: Treasury Government Securities known as: Treasury Bonds, Savings Bonds, etc…Bonds, Savings Bonds, etc…
National Debt-National Debt- is the total money owed by the government to is the total money owed by the government to anyone who owns a Treasury Bond or Savings Bonds. anyone who owns a Treasury Bond or Savings Bonds.
1. Payback-1. Payback- We owe We owe 11 trillion dollars 11 trillion dollars and the interest and the interest we owe must be paid first and cuts out on the goods or we owe must be paid first and cuts out on the goods or services the government can provide. (education, services the government can provide. (education,
defense, health care, etc…)defense, health care, etc…)
Difference between National Debt and Budget Deficit-Difference between National Debt and Budget Deficit- a a deficit is one year, and the national debt is the total amount deficit is one year, and the national debt is the total amount owed by the country.owed by the country.
Federal Reserve SystemFederal Reserve System Chaos- Chaos- Before 1913 every bank could print its own money, Before 1913 every bank could print its own money,
which meant at anytime there could be lots of money or very which meant at anytime there could be lots of money or very little money available for businesses and people.little money available for businesses and people.
Federal Reserve-Federal Reserve- established in 1913 to regulate the amount established in 1913 to regulate the amount of money available in the economy. of money available in the economy.
The Federal Reserve System OrganizationThe Federal Reserve System Organization1. Board of Governors-1. Board of Governors- 7 member group that oversees 7 member group that oversees the Federal Reserve and set monetary policy in the the Federal Reserve and set monetary policy in the
FMOCFMOCa. Chairman of the Federal Reserve-a. Chairman of the Federal Reserve- Ben BernankeBen Bernanke
Federal Reserve SystemFederal Reserve System2. 2. Federal Reserve Districts-Federal Reserve Districts- 12 Federal Banks throughout the 12 Federal Banks throughout the
country that monitor and report on economic activitycountry that monitor and report on economic activity
3. Member Banks-3. Member Banks- all nationally chartered banks join the all nationally chartered banks join the Federal Reserve and are partners allowing it to operate Federal Reserve and are partners allowing it to operate independently of the government.independently of the government.
4. FOMC-4. FOMC- Federal Open Market Committee is composed of the Federal Open Market Committee is composed of the Board of Governors and 12 District BanksBoard of Governors and 12 District Banks
Structure of the Federal Reserve System1
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The Federal Reserve as a serverThe Federal Reserve as a server Federal Reserve serving the GovernmentFederal Reserve serving the Government
1. Bonds-1. Bonds- The Fed sells all U.S. bonds The Fed sells all U.S. bonds
2. Currency-2. Currency- The Fed prints all paper moneyThe Fed prints all paper money
Federal Reserve serving BanksFederal Reserve serving Banks
1. Checks-1. Checks- all checks are cleared through the Fed all checks are cleared through the Fed
2. Bank reserves-2. Bank reserves- ensures that banks maintain 10% of ensures that banks maintain 10% of all all deposits to cover their customers.deposits to cover their customers.
3. Lender of Last Resort-3. Lender of Last Resort- in case of emergency (2008) in case of emergency (2008) the Fed will lend money to commercial banks to keep the Fed will lend money to commercial banks to keep
them afloat.them afloat.
4. Problems-4. Problems- the Fed can force banks to sell risky the Fed can force banks to sell risky investments if they are too exposed to too much liabilityinvestments if they are too exposed to too much liability
The Fed regulates the money The Fed regulates the money supplysupply
MONETARY POLICY-MONETARY POLICY- changes in the supply of money and changes in the supply of money and credit offered by the Federal Reserve.credit offered by the Federal Reserve.
What affects the money supply?What affects the money supply?1. Money-1. Money- allows for easier transactions allows for easier transactions2. Higher prices-2. Higher prices- as prices rise so does the demand as prices rise so does the demand
for for cashcash3. Interest Rates-3. Interest Rates- The price charged to borrow money, The price charged to borrow money, High Interest=decrease demand for cash. High Interest=decrease demand for cash. Low Interest=increase demand for cashLow Interest=increase demand for cash4. Home Income-4. Home Income- as income rises so does the demand as income rises so does the demand for more cashfor more cash5. Watching-5. Watching- The Fed watches the supply of money The Fed watches the supply of money
and and the demand for money to keep inflation low.the demand for money to keep inflation low.
First tool of the Federal ReserveFirst tool of the Federal Reserve
The First Tool- Required Reserve RatioThe First Tool- Required Reserve Ratio1. Required Reserve Ratio-1. Required Reserve Ratio- the amount of money a the amount of money a
bank bank must keep on hand and not loan out, set by the FED.must keep on hand and not loan out, set by the FED.
2. Reducing the RRR-2. Reducing the RRR- lowering it allows banks to lend lowering it allows banks to lend out more money. out more money. (MONEY SUPPLY INCREASES)(MONEY SUPPLY INCREASES)
3. Increasing the RRR-3. Increasing the RRR- raising it causes banks to keep raising it causes banks to keep more money on handmore money on hand. (MONEY SUPPLY . (MONEY SUPPLY
DECREASES)DECREASES)
SecondSecond Tool of the Federal Reserve Tool of the Federal Reserve
The Second Tool- Discount RateThe Second Tool- Discount Rate1. Discount Rate-1. Discount Rate- the interest rate banks pay to borrow the interest rate banks pay to borrow money from The Fed.money from The Fed.
2. Reducing the Discount Rate-2. Reducing the Discount Rate- makes it easier for makes it easier for banks banks to loan out money by making it cheaper for banks to to loan out money by making it cheaper for banks to borrow. borrow. (MONEY SUPPLY INCREASES)(MONEY SUPPLY INCREASES)
3. Increasing the Discount Rate-3. Increasing the Discount Rate- makes it harder for makes it harder for banks to borrow money by making it more expensive to banks to borrow money by making it more expensive to borrow money. borrow money. (MONEY SUPPLY DECREASES)(MONEY SUPPLY DECREASES)
Third Tool of the Federal ReserveThird Tool of the Federal Reserve
The Third Tool- Open Market OperationsThe Third Tool- Open Market Operations1. Open Market Operations-1. Open Market Operations- the buying and selling of the buying and selling of
government securities to alter the money supply.government securities to alter the money supply.
2. Bond Purchaser-2. Bond Purchaser- the Fed buys securities. the Fed buys securities. (MONEY SUPPLY INCREASES)(MONEY SUPPLY INCREASES)
3. Bond Seller-3. Bond Seller- the Fed sells securities. the Fed sells securities. (MONEY SUPPLY DECREASES)(MONEY SUPPLY DECREASES)
Why does the Federal Reserve Why does the Federal Reserve watch money?watch money?
Money and Business Cycles-Money and Business Cycles-1. EASY MONEY POLICY- 1. EASY MONEY POLICY- During a bad economyDuring a bad economy
The The Fed will relax interest rates to increase spending, this Fed will relax interest rates to increase spending, this EXPANDS the ECONOMYEXPANDS the ECONOMY
2. TIGHT MONEY POLICY- 2. TIGHT MONEY POLICY- The Fed will raise interest The Fed will raise interest rates, to decrease spending and lower the money rates, to decrease spending and lower the money
supply. This is to supply. This is to CUT OFF INFLATIONCUT OFF INFLATION3. Timing-3. Timing-
a. Right-a. Right- the economy will go through peaks the economy will go through peaks and and contractions quickly and easily.contractions quickly and easily.
b. Bad-b. Bad- The economy will go through extreme The economy will go through extreme cycles of Expansions and Contractions cycles of Expansions and Contractions
American Banking SystemAmerican Banking System Financial System- this is a system that transfers money
between savers and borrowers
Financial Middlemen1. Banks- Take in deposits from savers and then lend
some of these funds to various businesses. 2. Finance Company- Make loans to consumers and
small businesses, but charge borrowers higher fees and interest rates to cover possible losses.
3. Mutual Funds- Pool the savings of many individuals and invest this money in a variety of stocks and bonds.4. Life Insurance Companies- Provide financial
protection for Life, Auto, Home, Disability. 5. Pension Funds- Are set up by employers to collect
deposits and distribute payments to retirees
Financial Intermediaries
Commercial banksSavings & loan associations
Savings banksMutual savings banks
Credit unions
Financial Institutions that make loans to…
Life insurance companiesMutual funds
Pension fundsFinance companies
InvestorsSavers make deposits to…
Services offered by Services offered by Financial Institutions Financial Institutions
Savings-Savings- placed directly in an account with a bank it earns a placed directly in an account with a bank it earns a little interest.little interest.
1. Safe-1. Safe- very safe since banks must keep a certain very safe since banks must keep a certain amount of RRR to pay on savings accounts.amount of RRR to pay on savings accounts.
2. Federal Deposit Insurance Company (FDIC)-2. Federal Deposit Insurance Company (FDIC)- government agency that insures up to 250k on all government agency that insures up to 250k on all savings accounts.savings accounts.
Interest-Interest- money banks pay on your savings accounts. money banks pay on your savings accounts.1. Interest Earned-1. Interest Earned- amount paid on a bond, savings amount paid on a bond, savings
account, CD or stocks.account, CD or stocks.2. Interest Charged-2. Interest Charged- amount you are charged by a amount you are charged by a
bank bank when you borrow money for a car, house, student when you borrow money for a car, house, student loan. loan. THIS IS HOW BANKS MAKE MONEY.THIS IS HOW BANKS MAKE MONEY.
Services cont’d…Services cont’d… Certificate of Deposit (CD)-Certificate of Deposit (CD)- you deposit a fixed amount for a you deposit a fixed amount for a
certain period of time, in exchange for a higher interest rate.certain period of time, in exchange for a higher interest rate.
1. Safe-1. Safe- very safe no risks very safe no risks
Bonds-Bonds- are IOU’s that you buy from a corporation, are IOU’s that you buy from a corporation, organization or government.organization or government.
1. Payment-1. Payment- the borrower pays you periodically the borrower pays you periodically interest interest on the loan and then repays you the entire loan on the loan and then repays you the entire loan on the on the due date, usually years later.due date, usually years later.
2. How are Bonds used?2. How are Bonds used? - Government uses them to - Government uses them to pay pay other debts or public good projects. Corporations use other debts or public good projects. Corporations use them for capital investments.them for capital investments.
3. Safe-3. Safe- very safe no risks very safe no risks
Services cont’d… Services cont’d… StocksStocks- offer the biggest payouts but the highest risks- offer the biggest payouts but the highest risks
1. Safe-1. Safe- Very Risky can lose all your money Very Risky can lose all your money 2. Capital Gains-2. Capital Gains- if you sell your stocks at a profit you if you sell your stocks at a profit you
pay these taxes on the stocks sold.pay these taxes on the stocks sold.
Mutual Funds-Mutual Funds- pools of money from many different investors to pools of money from many different investors to buy a large variety of stocks in a PORTFOLIO.buy a large variety of stocks in a PORTFOLIO.
1. Safe-1. Safe- a combination of both High Risk and Low Risk a combination of both High Risk and Low Risk stocks- Makes this safestocks- Makes this safe2. Why Buy-2. Why Buy- because of the mix investors almost because of the mix investors almost
never never lose all their moneylose all their money
Becoming CreditworthyBecoming Creditworthy Are you creditworthy?Are you creditworthy?
1. Work1. Work2. Income2. Income3. Savings3. Savings4. Current Expenses 4. Current Expenses 5. How many people depend on you for their needs5. How many people depend on you for their needs6. Debt6. Debt7. 7. Collateral-Collateral- something the bank can take from you if something the bank can take from you if
you fail to repay your loanyou fail to repay your loan88. Credit History-. Credit History- shows if you pay your bills shows if you pay your bills9. 9. Credit Score-Credit Score- Higher it is the more likely a bank will Higher it is the more likely a bank will
lend you money and vice versalend you money and vice versa
Interest RatesInterest Rates Annual Percentage Rate-Annual Percentage Rate- the amount charged annually the amount charged annually
Fixed Interest Rates-Fixed Interest Rates- never changes never changes
Variable Interest Rates-Variable Interest Rates- can go up at any time can go up at any time
Simple Interest Rates-Simple Interest Rates- you are charged interest only on the you are charged interest only on the original amount of the loan.original amount of the loan.
$1,000 loan with 10% interest rate for a year=$1,000 loan with 10% interest rate for a year=
1,000 + (.10 x 1000)= $1,000 + 100= $1,1001,000 + (.10 x 1000)= $1,000 + 100= $1,100
Let’s try another:Let’s try another: $1,000 @ 10% interest for 2 years, $1,000 @ 10% interest for 2 years, remember to add a (.10 x 1000 for each year).remember to add a (.10 x 1000 for each year).
Interest RatesInterest RatesCompound Interest Rates:Compound Interest Rates: interests is charged not only on the interests is charged not only on the
original amount you borrowed, but also on the amount you original amount you borrowed, but also on the amount you still owe. still owe.
$1,000 loan with 10% interest rate for 2 years=$1,000 loan with 10% interest rate for 2 years=
11stst year: $1,000+ (.10 x 1,000)= $1,000 + 100= $1,100 year: $1,000+ (.10 x 1,000)= $1,000 + 100= $1,100
22ndnd year: $1,000+ (.10 x 1,100)= $1,100 + $110= year: $1,000+ (.10 x 1,100)= $1,100 + $110= $1,210$1,210
Credit cards:Credit cards: use compounded interest rates but monthly, use compounded interest rates but monthly, which causes people to owe more and more each month.which causes people to owe more and more each month.
