Drill 10/30Drill 10/30 How did the Chinese How did the Chinese

government restrict trade government restrict trade with foreign merchantswith foreign merchants

How did this policy illustrate How did this policy illustrate their overall opinion of their overall opinion of foreigners?foreigners?

China forced trade in China forced trade in only a few key ports only a few key ports

China distrusted China distrusted foreign merchants due foreign merchants due to Confucian beliefsto Confucian beliefs

Classical viewClassical viewThe government The government stays out of the stays out of the market’s waymarket’s way

The market fixes The market fixes itselfitself

Keynesian ViewKeynesian ViewThe government The government influences the market influences the market through spendingthrough spending

Increasing government Increasing government spending even if it spending even if it creates a deficitcreates a deficit

Drill 10/30Drill 10/30Describe the Classical, Describe the Classical,

Keynesian and Keynesian and Supply-side Economic Supply-side Economic

viewsviews

Supply-Side ViewSupply-Side ViewThe Government The Government crafts policy to crafts policy to increase supplyincrease supply

lower taxes, especially lower taxes, especially corporate taxescorporate taxes

Monetary & Fiscal Monetary & Fiscal PolicyPolicy

ORORWhat the #$%@ is What the #$%@ is happening to my happening to my #$^&%$ money?!#$^&%$ money?!

Drill 10/31Drill 10/31Define Fiscal + Define Fiscal + Monetary PolicyMonetary Policy

Fiscal PolicyFiscal PolicyFederal government’s Federal government’s use of taxation & use of taxation & spending policies to spending policies to affect overall affect overall business activitybusiness activity

Monetary PolicyMonetary PolicyPolicy that involves Policy that involves changing the rate of changing the rate of growth of the supply growth of the supply of money in of money in circulationcirculation

The Federal ReserveThe Federal ReserveNation’s central Nation’s central banking organization; banking organization; regulates U.S. regulates U.S. monetary & financial monetary & financial systemsystem

Structure of the FedStructure of the FedThe Board of Governors

The 12 District Banks

Almost 30,000 other member banks and depository institutions

7 Member board, appointed by the President (confirmed by the senate) one 14 year term

All nationally chartered banks are required to join the fed systemOther banks have state-charters

Monetary Policy Monetary Policy VocabVocab

Reserve RequirementsReserve Requirements Banks required to keep percentage Banks required to keep percentage

of deposits on account w/ the Fedof deposits on account w/ the Fed Prohibited from lending this out to Prohibited from lending this out to

customerscustomers

Open Market OperationsOpen Market Operations Fed buys & sells gov’t securities Fed buys & sells gov’t securities

to influence amount of cash in to influence amount of cash in circulationcirculation

Government SecuritiesGovernment Securities Financial instruments Financial instruments (i.e. (i.e.

bonds)bonds) used by the federal used by the federal gov’t to borrow money. gov’t to borrow money.

Gov’t securities are issued by Gov’t securities are issued by the U.S. Treasury to cover the the U.S. Treasury to cover the federal govt's budget deficit.federal govt's budget deficit.

Interest RateInterest Rate The price of funds expressed as a The price of funds expressed as a

percentage of the total amount loaned percentage of the total amount loaned or borrowedor borrowed

The cost of borrowing funds and the The cost of borrowing funds and the payment received for lending payment received for lending

Influenced by discount rateInfluenced by discount rate

Discount RateDiscount Rate Interest rate the Fed charges banks Interest rate the Fed charges banks

for short-term loans of reservesfor short-term loans of reserves Effects rates banks offer for loans Effects rates banks offer for loans

& savings& savings

Why do all thisWhy do all this What is the FED trying to What is the FED trying to

control?control?

ANNOUNCEMENTANNOUNCEMENT After much considerationAfter much consideration Your test will be pushed back Your test will be pushed back

to to THURSDAYTHURSDAY of next week of next week It will be the first grade of It will be the first grade of

the second quarterthe second quarter

Drill 11/1Drill 11/1Define the three Define the three types of Inflationtypes of Inflation

Inflation Inflation A general increase in pricesA general increase in prices

Three typesThree typesThe Demand-PullThe Demand-Pull

Limited quantity causes prices to go upLimited quantity causes prices to go upThe Cost-Push TheoryThe Cost-Push Theory

Employers paying higher wages, costs Employers paying higher wages, costs go up, employees demand higher go up, employees demand higher wageswages

The Quantity TheoryThe Quantity Theory

Quantity TheoryQuantity Theory There is too much money in There is too much money in

circulation circulation So people are willing to pay more So people are willing to pay more

for goods because they have more for goods because they have more moneymoney

Ideally money in circulation should Ideally money in circulation should increase at the same rate as the increase at the same rate as the economy (real GDP)economy (real GDP)

The Money SupplyThe Money SupplyControlling the Controlling the money supply money supply controls the controls the economy and economy and inflationinflation

Money SupplyMoney SupplyIt includesIt includes

Open Market OperationsOpen Market Operations Manipulating Reserve Manipulating Reserve RequirementsRequirements

Manipulating Interest RatesManipulating Interest Rates

Money CreationMoney Creation$1000 Deposit

$900 loan to another customer, She gives it as a gift

$810 Loan to Yet ANOTHER customer

That $900 is deposited in another account

Reserve Requirement of 10%

By the end of the line the money supply has INCREASED by $2,710

$1000 + $900 + $810 = $2,710

Money multiplier EffectMoney multiplier EffectIncrease in money supply =

initial cash deposit X 1/reserve requirement

Using the 10% from the last example what is the increase of the money supply after an initial $1,000?

$10,000

Economic Economic Problem SolvingProblem Solving

With a partnerWith a partner Read page 430 – 434Read page 430 – 434 Complete questions 1-6Complete questions 1-6

This will be collectedThis will be collected

SummarySummaryWhich of the Fed’s Which of the Fed’s tools is the most tools is the most effective for effective for regulating the regulating the economy and why?economy and why?