Monetary Policy and Federal Reserve Essay

CHAPTER 16: ECONOMIC POLICY
ECONOMIC POLICY: a law, rule, statute, or edict that expresses he govt.’s goals and provides for rewards and punishments to promote their attainment
GROSS DOMESTIC PRODUCT (GDP): the total value of goods and services produced within a country
MONETARY SPENDING
KEYNESIANS: followers of the economic theories of John Maynard Keynes, who argued that the government can stimulate the economy by increasing public spending or by cutting taxes
After WWII, Keynesian ideas guided economic policy making across the industrialized world.
Uses spending and tax policy to promote growth and low unemployment, dominated economic policy during the ‘60s and the first half of the ‘70s
MONETARISTS: followers of economic theories that contend that the role of the government in the economy should be limited to regulating the supply of money
MONETARY POLICY: an effort to regulate the economy through the manipulation of the supply of money and credit (controlling availability of money to banks). America’s most powerful institution in this area of monetary policy is the Federal Reserve Board.
FEDERAL RESERVE SYSTEM (1913): a system of 12 Federal Reserve Banks that facilitate exchanges of cash, checks, and credit; regulates member banks; and uses monetary policies to fight inflation and deflation
Its power is its ability to expand and contract the amount of credit available in the US
2nd power: its control over the reserve requirement (the amount of liquid assets and ready cash that banks are required to hold to meet depositors’ demands for their money
3rd power: open-market operations (method by which the Open Market Committee of the Federal Reserve System buys and sells government securities to help finance government operations and to reduce or increase the total amount of money circulating in the economy
BEN BERNANKE: appointed by president Bush, promised to not be influenced by politics; the Fed seeks to regulate the US economy by manipulating the supply of money and credit.
Since the late ‘70s, when President Carter began to emphasize monetary policy, the chairman of the Federal Reserve has occupied the key position in economic policy making
Federal funds rate: the interest rate on loans between banks that the Federal Reserve Board influences by affecting the supply of money available
FISCAL POLICY: the government’s use of taxing, monetary, and spending powers to manipulate the economy
Income tax (16th amendment in 1913), a product of industrial abuse, progressive era’s agencies to prevent those abuses, and a way to pay for regulatory agencies
Before WWII, income taxes accounted for 14% of federal revenues.
WWII needed more revenue; 44%
PROGRESSIVE TAXATION: taxation that hits upper income brackets more heavily
REGRESSIVE TAXATION: taxation that hits lower income brackets more heavily; people in the lower income bracket pay a higher proportion of their income toward the tax than people in higher income brackets.
Ex) Social Security tax
Social insurance taxes rose from 15% to 40%
Primary purpose of the graduated income tax is to raise revenue but a second objective is REDISTRIBUTION (a policy whose objective is to tax or spend in such a way as to reduce the disparities of wealth between the lowest and the highest income brackets.
Loophole: incentive to people and businesses to reduce their tax liabilities by investing their money in areas that the govt. designates.
The federal government’s power to spend is one of the most important tools of economic policy
Budget deficit: amount by which government spending exceeds government revenue in a fiscal year
The Office of Management and Budget (OMB) in the Executive Office of the President is responsible for preparing the president’s budget.
Congress created the Congressional Budget Office (CBO) so that it could have reliable info about the costs and economic impact of the policies it considers
A very large and growing proportion of the annual

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Federal Reserve Monetary Policy