Economic Policy

Fiscal and Monetary

Policy•What is policy?

–Actions decided upon by government agencies/branches and

usually involving choices among competing alternatives.

Making Policy

•Presidents/Congress make economic policy

•President and bureaucrats make/enforce economic policy

President

• Influences fiscal policy by proposing a budget,

• Signing or vetoing legislation related to taxing, spending or borrowing money.

• OMB recommends the budget

Congress

• Passes the Federal budget—usually makes adjustments to President’s budget!

• Acts on taxes or spending legislation

• CBO-Congressional budget office– advises Congress on economic policy

Economic Policy

Government chooses an economic course of action in 2 arenas:–Fiscal policy–Monetary policy

Fiscal Policy

•Government regulation of the economy through its control over

•rates of taxation •government spending

Monetary Policy

•Government regulation of the economy through its control over

•supply of money •Credit cost/availability

Fiscal Policy Tools

•The budget–Surplus, balance, deficit–Spending/borrowing–GAO/Comptroller General/CBO/OMB–Taxes/IRS

Monetary Policy Tools

• Federal Reserve System a)Open market operationsb)Discount ratec)Size of reservesd)Margin requirements

(a) Open market operations

•Buying and selling on the open market–Savings bonds–Treasury notes–Treasury bills

(b) Discount rate

• 12 Reserve Banks 25 Reserve Branch Banks Additional member banks

(U.S./Federal) • Charge member banks ever-

changing rates of interest for loans from the Federal Reserve

(c) Raise/lower reserve rates• To speed up the economy, the

Fed lowers the reserve require- ments to put more money into circulation

• To slow down the economy, the Fed raises the reserve requirement to take money out of circulation

(d) Raise/lower margin

• Margin requirement defines how much money people can borrow to purchase government securities (bonds, T-notes, T-bills) Raising the margin requirement limits purchases– Lowering the margin requirement

increases purchases.

Summary •Economic Policy•Fiscal Policy•Monetary Policy•Fiscal Policy Tools•Monetary Policy Tools

• Thanks to Jennifer Copley for these slides!