Fiscal Policy Review - The Payroll Tax Cut

• http://www.youtube.com/watch?v=yB1DdBP3FH0• What does it pay for?• How much do American’s pay?• How much do they pay after the cut?• What is the cap?• What type of fiscal policy?– Expansionary or contractionary?– Automatic/mandatory or discretionary?

• What is a potential negative consequence?

Class Auction

• Want to buy this piece of candy?• What are you willing to trade for it?• What is required for this trade (barter) to

work?• What is the solution for this “double

coincidence of wants?”

The Monetary System

EQ: What is money?

What is money? Create a definition.

What is Money?

Money is anything that is accepted for the repayment of debt and as payment for goods and services.

http://www.youtube.com/watch?v=TLVoV6gK8mE

Types of Money

Commodity Money Fiat Money

What type of money does the U.S. use?

3 Functions of Money

• Use your book to define each and provide examples to show how each function works:1. Medium of exchange2. Unit of account/standard of value3. Store of value

Functions of Money

• Medium of Exchange

Functions of Money

• Standard of Value

Functions of Money

• Store of Value

Summary

• Draw the 3 functions of money – do not label the function

• Then with a partner, switch papers and each partner tries to identify each picture

Review

• What is the definition of money?• What are the two kinds of money?– What is the difference between the two?

• What are the three functions of money?

Quick Video

Practice

Durable Limited

Characteristics of Money

Portable Divisible

It is important that money is ___________ because………………………

PracticeDivisibility Limited

Review

1. What causes inflation?2. Who is inflation bad for? Who can inflation

help?3. What is our definition of interest rates?4. What stage of the business cycle is most

commonly associated with inflation?5. What stage of the business cycle is most

commonly associated with unemployment?

What is the name of the bank that manages the U.S. money supply?• In Plain English Activity

How is money created?

• http://www.youtube.com/watch?v=3HdmA3vPbSU

Activity

• Create a brochure for the Fed. Be sure to include the following:– State the purpose of the Fed and what it is.– How the Fed is structured.– What are its regulatory responsibilities?– What are the three tools of monetary policy?

The FED

• Privately Owned- banks buy stock in the Fed

like a corporation

• Board of Governors- 7 member board

appointed by the Fed. Set policies for the Fed

• Federal Reserve District Banks- Nation is

divided into 12 districts. Each district bank

runs a district and has a president and board

of directors

FED Chairman

What is monetary policy?

• Actions by the Federal Reserve System to expand or contract the money supply in order to influence the macro-economy

• What happens if they over expand the money supply?

The Federal Reserve System

• The Federal Reserve (Fed) serves as the nation’s central bank – created 1913.– oversee the banking system.– regulates the money supply (monetary policy).– lender of last resort.

Monetary policy• Easy Money policies (expansionary) – increase

the money supply and cause economic growth• Tight Money policies (contractionary) - decrease

the money supply and slow down the economy.

Monetary Policy Tools

1. Federal Open Market Operations Committee (FOMC)

2. Reserve Requirement3. Discount Rate

But first… what is a bond?

• http://www.youtube.com/watch?v=5Xzl-Ej2vHQ

• Bond – like an IOU• Interest – payment for the use of borrowed

money• Maturity – when the borrowed money needs

to be repaid

What do high interest rates mean for the economy? Low?

*******FOMC******

• To increase the money supply, the Fed buys government bonds (securities) from the public.

• To decrease the money supply, the Fed sells government bonds to the public.

What does an increase in the money supply do to the interest rates and price levels? Decrease?

Review

• Scenario – high unemployment and low growth1. Action by FED – easy or tight? Why?2. OMO – Buy or sell bonds? Why?3. What happens to money supply? Why?4. What happens to interest rates? Why?5. What happens to investment? Why?6. What happens to aggregate demand? Why?

Reserve Requirement

• Reserves are deposits that banks have received but have not loaned out.

• The reserve requirement is the fraction of deposits that banks must hold as reserves (set by the FED).

How is money created out of thin air? http://www.youtube.com/watch?v=AgKFLk9xffA

The Fed and the Reserve Requirement

• What does changing the reserve requirement from 10% to 20% do the money supply? Interest rates?

• What does decreasing the reserve requirement do to the money supply? Interest rates?

The Discount Rate (no longer used)

• The discount rate is the interest rate the Fed charges banks for loans.– Increasing the discount rate decreases the money

supply. – Decreasing the discount rate increases the money

supply.

What type of monetary policy? Why?

What type of monetary policy? Why?

FED REVIEW

• http://www.youtube.com/watch?v=HdZnOQp4SmU

What are some potential problems with controlling the money supply?• The Fed’s control of the money supply is not

precise.• The Fed must wrestle with two problems that

arise due to fractional-reserve banking.– The Fed does not control the amount of money

that households choose to hold as deposits in banks.

– The Fed does not control the amount of money that bankers choose to lend.

RR _____DR _____OMO – Buy or SellMS _____Excess Reserves _____Interest rate _____I_____AD ______

Monetary policy in action

Easy/Expansionary Policy Tight/Contractionary Policy

RR _____DR _____OMO – Buy or SellMS _____Excess Reserves _____Interest rate_____I_____AD ______

↓ RR= Banks can loan more $Fed Buys OMO’s = bank have more $ fewer bonds↓Discount Rate= Fed lowers cost of borrowing

↑RR = Banks have less $ to loan out.Fed Sells OMO’s = banks have less $ and more Bonds↑Discount Rate = Fed lowers cost of borrowing

Monetary policy in actionEasy Money Tight Money

Summary

Excess Reserves Interest Rates

So…. How do monetary policies affect macroeconomic goals?

• http://www.frbsf.org/education/activities/chairman/