Economic Policy

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Economic Policy

• Fiscal policy - Taxing, spending, and borrowing
  policies of the federal government.
• Monetary policy directed by The Federal Reserve
  (The Fed) control the supply of money set
  interest rates.
• Monetarism - the supply of money is the key to
  the nation's health, and having too much cash and
  credit in circulation stimulates inflation.

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The Federal Reserve

• Chairman Janet Yellen (4 Year Terms) 14
  Governors (14 Year Terms) appointed by the
  President confirmed by the Senate.
• Independent Executive Agency with the power to
• Set discount rates for the money that banks can
  borrow from the Federal Reserve.
• Set reserve requirements that determine the
  amount of money that banks must keep in reserve
  at all times.
• Buy and sell government securities in the market,
  thereby either expanding or contracting the money
  supply.
• Ben Bernanke's Greatest Challenge - 60 Minutes -
  CBS News

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Economic Review Terms

• budget deficit A situation in which the
  government spends more than it takes in, thus
  pumping more money into the economy.
• budget surplus A situation in which the
  government takes in more money than it spends,
  thus draining money out of the economy.
• budget resolution A total budget ceiling and a
  ceiling for each of several spending areas
  submitted by the Budget Committees in the House
  and Senate to their respective chambers. These
  resolutions serve as targets to guide the work of
  each legislative committee as it decides what
  should be spent in its area.

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Economic Theory

• Keynesianism A liberal economic theory developed
  by English economist John Maynard Keynes, who
  believed that economic health depends on the
  proportions of income which are saved and spent.
  The government's task is to create the right
  level of demand. When demand is too low, the
  government should pump money into the economy
  through spending on its programs. When demand is
  too great, the government should take money out
  of the economy by increasing taxes or cutting
  spending.

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Economic Theory

• supply-side theory A conservative economic theory
  that maintains that sharp tax cuts increase the
  incentive for people to work, save, and invest.
  The greater productivity of the economy
  stimulated by these increased investments would
  produce more revenue for the government despite
  the tax cut.
• Reaganomics The economic program advocated by
  economist Arthur Laffer and instituted by
  President Ronald Reagan in 1981 which combined
  the theories of monetarism, supply-side tax cuts,
  and domestic budget cutting. The goal was to
  reduce the size of the federal government, to
  stimulate economic growth, and to increase
  American military strength.

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Economic Theory

• Monetarism. Monetarists such as Milton Friedman
  hold that inflation is the result of too much
  money chasing too few goods. This occurs when
  government prints too much money. When government
  tries to stop inflation by decreasing the money
  supply, unemployment increases. Rather than
  adopting these start-and-stop policies, it would
  be better if government allowed the money supply
  to increase steadily and consistently at a rate
  about equal to the growth in the productivity of
  the economy.

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Iron TrianglesRevolving DoorWhat Drives
Record Spending on Defense? NPR
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Factors that Drive Federal Spending

• Discretionary Spending Defense, Education,
  Homeland Security, Agriculture, etc interest
  groups keep this spending from getting cut.
• Mandatory Spending Interest on the debt,
  Pensions, Social Security, Medicare entitlements
  and other promises also hard to cut.
• . . . To be continued.