Please write down the 4 fill in the blank statements. Use the chart on the next slide to answer the blanks. Will turn in 4 Weekly Warm Ups on Friday (1.8.16) 1.How many people were killed in the earthquake that rocked Nepal earlier this year? 2.The White House celebrated two diplomatic successes with what countries? 3.When does the Air Force hope to have lasers on some military jets? 4.How much was the granny shot worth? Please write down the 4 questions. Use the chart on the next slide to answer. Will turn in 4 Weekly Warm Ups on Friday (1.8.16) 1.According to the chart, what is the unemployment rate if you do not have a high school diploma? 2.According to the chart, what degree has the lowest unemployment rate? 3.What is the weekly median salary for someone with only a high school diploma? 4.According to the chart, what is the weekly median salary for someone with a Masters degree? Please write down the 4 questions. Use the chart on the next slide to answer. Will turn in 4 Weekly Warm Ups on Friday (1.8.16) 1.According to the chart, what is the unemployment rate if you do not have a high school diploma? 2.According to the chart, what degree has the lowest unemployment rate? 3.What is the weekly median salary for someone with only a high school diploma? 4.According to the chart, what is the weekly median salary for someone with a Masters degree? Please write down the 4 questions. Use the chart on the next slide to answer. Will turn in 4 Weekly Warm Ups on Friday (1.8.16) 1.According to the chart, what was the cost of a gallon of milk in the year 2000? 2.According to the chart, how much did the price of bread rise from 2010 to 2013? 3.According to the chart, how much did the price of a movie ticket rise between 2000 and 2010? 4.According to the chart, what was the average price of a new car in the 1970s? What Is Gross Domestic Product? Economists monitor the macroeconomy using national income accounting, a system that collects statistics on production, income, investment, and savings. Gross domestic product (GDP) is the dollar value of all final goods and services produced within a countrys borders in a given year. GDP does not include the value of intermediate goods. Intermediate goods are goods used in the production of final goods and services. Gross Domestic Product Gross domestic product (GDP) is the total market (or dollar) value of all final goods and services produced in a country during a given period of time GDP does not include Work in homes Criminal activity Underground economy Limitations of GDP GDP does not take into account certain economic activities, such as: Nonmarket Activities GDP does not measure goods and services that people make or do themselves, such as caring for children, mowing lawns, or cooking dinner. Negative Externalities Unintended economic side effects, such as pollution, have a monetary value that is often not reflected in GDP. The Underground Economy There is much economic activity which, although income is generated, never reported to the government. Examples include black market transactions and "under the table" wages. Quality of Life Although GDP is often used as a quality of life measurement, there are factors not covered by it. These include leisure time, pleasant surroundings, and personal safety. Is it part of GDP? A parent that stays home to care for a baby Dinner at a restaurant Dinner at home A social security check A haircut The construction of an office building The sale of a ten-year-old house An oil change Interest on a CD at your bank A new car Tires purchased by Ford to put on a new car A parent that stays home to care for a baby No Dinner at a restaurant Yes Dinner at home No, but yes on the groceries A social security check No A haircut Yes, unless you did it yourself The construction of an office building Yes The sale of a ten-year-old house No An oil change Yes, unless you did it yourself Interest on a CD at your bank No A new car Yes Tires purchased by Ford to put on a new car No GDP: Two Methods Expenditure method (product market) what is produced is also purchased Income method (resource market) the total value is the sum of all the parts VideoVideo Consumer goods include durable goods, goods that last for a relatively long time like refrigerators, and nondurable goods, or goods that last a short period of time, like food and light bulbs. Calculating GDP The Expenditure Approach The expenditure approach totals annual expenditures on four categories of final goods or services. 1. Consumer goods and services 2. Business goods and services 3. Government goods and services 4. Net exports or imports of goods or services. The Income Approach The income approach calculates GDP by adding up all the incomes in the economy. Expenditures GDP = C + I + G + Xn Consumption (C) Consumer durables Consumer nondurables Services Investment (I) Business investment Residential investment Inventory investment Government purchases (G) Federal State Local NOT transfer payments Net exports (Xn) Exports MINUS Imports Income GDP W + R + I + P Labor Wages Land Rent Capital Interest Entrepreneur Profit Nominal and Real GDP Year 1 Nominal GDP Suppose an economys entire output is cars and trucks. This year the economy produces: 10 cars at $15,000 each = $150, trucks at $20,000 each = $200,000 Total = $350,000 Since we have used the current years prices to express the current years output, the result is a nominal GDP of $350,000. In the second year, the economys output does not increase, but the prices of the cars and trucks do: This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP. 10 cars at $16,000 each = $160, trucks at $21,000 each = $210,000 Total = $370,000 Year 2 Nominal GDP 10 cars at $15,000 each = $150, trucks at $20,000 each = $200,000 Total = $350,000 To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices from the base year. So we calculate the real GDP for Year 2 using the prices from Year 1: Year 3 Real GDP Real GDP for Year 2, therefore, is $350,000 Real and Nominal GDP Nominal GDP is GDP measured in current prices. It does not account for price level increases from year to year. Real GDP is GDP expressed in constant, or unchanging, dollars. Real GDP in the U.S. Please write down the 4 questions. Use the chart on the next slide to answer. Will turn in 4 Weekly Warm Ups on Friday (1.8.16) 1.What was the GDP growth for the year 2004 according to the chart? 2.According to the chart, what was the GDP growth for 2012? 3.According to the chart, what year saw the lowest trough for GDP? 4.According to the chart, what year saw the highest peak? Chapter 12SectionMain Menu A business cycle is a macroeconomic period of expansion followed by a period of contraction. What Is a Business Cycle? A modern industrial economy experiences cycles of goods times, then bad times, then good times again. There are four main phases of the business cycle: expansion, peak, contraction, and trough. SECTION26 Peak Trough One cycle Recovery Real GDP per year Peak: Peak: real GDP reaches its maximum. Recession: Recession: real GDP declines 6 months. Recovery: Recovery: an upturn - real GDP rises. Trough: Trough: real GDP reaches its minimum. Recession Time Peak Four Phases of the Business Cycle SECTION27 B u s i n e s s C y c l e s An Actual Business Cycle ($ billion, 1992 dollars) An Actual Business Cycle ($ billion, 1992 dollars) Real GDP Peak Peak Trough One Cycle 8085 SECTION28 Chapter 12SectionMain Menu Phases of the Business Cycle Expansion An expansion is a period of economic growth as measured by a rise in real GDP. Economic growth is a steady, long-term rise in real GDP. Peak When real GDP stops rising, the economy has reached its peak, the height of its economic expansion. Contraction Following its peak, the economy enters a period of contraction, an economic decline marked by a fall in real GDP. A recession is a prolonged economic contraction. An especially long or severe recession may be called a depression. Trough The trough is the lowest point of economic decline, when real GDP stops falling. Chapter 12SectionMain Menu What Keeps the Business Cycle Going? Business cycles are affected by four main economic variables: Business Investment When an economy is expanding, firms expect sales and profits to keep rising, and therefore they invest in new plants and equipment. This investment creates new jobs and furthers expansion. In a recession, the opposite occurs. Interest Rates and Credit When interest rates are low, companies make new investments, often adding jobs to the economy. When interest rates climb, investment dries up, as does job growth. Consumer Expectations Forecasts of a expanding economy often fuel more spending, while fears of recession tighten consumers' spending. External Shocks External shocks, such as disruptions of the oil supply, wars, or natural disasters, greatly influence the output of an economy. Chapter 12SectionMain Menu Things That Affect the Business Cycles Business Investment: High levels of business investment (capital good increases like machinery and equipment) promote expansion. Low levels of business investment contribute to contraction. Money and credit: When interest rates go up, people borrow less, and this less money is circulating in the economy, thus contributing to a contraction. Chapter 12SectionMain Menu Public Expectations: People will increase their spending if they believe the economy is strong. This helps promote expansion. External Factors: Like energy crisis and war. Chapter 12SectionMain Menu Forecasting Business Cycles Economists try to forecast, or predict, changes in the business cycle. Leading indicators are key economic variables economists use to predict a new phase of a business cycle. Examples of leading indicators are stock market performance, interest rates, and new home sales. Please write down the 4 questions. Use the chart on the next slide to answer. Will turn in 4 Weekly Warm Ups on Friday (1.8.16) 1.According to the graph, how much will $1,000 be worth in 5 years if the inflation rate is 5 percent? 2.According to the graph, how much will $1,000 be worth in 7 years if the inflation rate is 6 percent? 3.According to the graph, how much will $1,000 be worth in 25 years if the inflation rate is 4 percent? 4.According to the graph, how much will $1,000 be worth in 6 years if the inflation rate is 4 percent? Please write down the 5 questions. Will turn in at the end of class. 1.Which empire collapsed due to inflation even though they had no idea what inflation was at the time? 2.In Cost-Pull inflation, how does a business pass on extra costs from rise in raw materials? 3.What is the most common cause of Demand Pull inflation? 4.Why is inflation such a real problem? 5.What are some of the factors that can derail low inflation? Define Gross Domestic Product, economic growth, unemployment, Consumer Price Index, Inflation, stagflation, and aggregate supply, and aggregate demand Why do prices change over time? Chapter 12SectionMain Menu The Effects of Rising Prices Inflation- a general increase in prices Chapter 12SectionMain Menu The Effects of Rising Prices Purchasing power- the ability to purchase goods and services, is decreased by rising prices Chapter 12SectionMain Menu The Effects of Rising Prices Price level - the relative cost of goods and services in the entire economy at a given point in time Chapter 12SectionMain Menu Chapter 12SectionMain Menu Degrees of Inflation Creeping inflation Range of 1-3% Galloping inflation Can go as high as % Hyperinflation Out of control In range of 500% Doesnt happen often last stage before monetary collapse. (WW II Hungary and Germany) Chapter 12SectionMain Menu Causes of Inflation The Quantity Theory- too much money in the economy leads to inflation; inflation can be tamed by increasing the money supply at the same rate that the economy is growing. The Cost-Push Theory- inflation occurs when producers raise prices in order to meet increased costs Leads to wage-price spiral- the process by which rising wages cause higher prices and higher prices cause higher wages Chapter 12SectionMain Menu Causes of Inflation The Demand-Pull Theory- inflation occurs when demand for goods and services exceeds existing supplies Wage-price spiral self-perpetuating spiral higher prices force workers to ask for higher wages. Producers try to recover this by raising prices, which forces workers to ask for higher wages. Chapter 12SectionMain Menu Effects of Inflation Purchasing Power The dollar will not buy the same amount of goods that it did in years past. Interest Rates When a bank's interest rate matches the inflation rate, savers break even. When a bank's interest rate is lower than the inflation rate, savers lose money. Income If wage increases match the inflation rate, a worker's real income stays the same. If income is fixed income, or income that does not increase even when prices go up, the economic effects of inflation can be harmful. Please write down the 4 questions. Use the chart on the next slide to answer. 1. What is the relative value of $100 in the state of Georgia? 2. Which state offers you the best value for your $100? 3. Which state offers you the closest real value for your $100? 4. Which state offers you the worst value for your $100? Chapter 12SectionMain Menu Define Gross Domestic Product, economic growth, unemployment, Consumer Price Index, Inflation, stagflation, and aggregate supply, and aggregate demand What is the consumer price index? Chapter 12SectionMain Menu Price Indexes Price Index- a measurement that shows how the average price of a standard group of goods change over time Chapter 12SectionMain Menu Price Indexes Consumer Price Index (CPI)- a price index determined by measuring the price of a standard group of goods meant to represent the market basket of a typical urban consumer Chapter 12SectionMain Menu Price Indexes Market Basket- a representative collection of goods and services Inflation Rate- the percentage of change in price level over time Chapter 12SectionMain Menu Calculating the CPI Price index = cost today X 100 cost in base year Price index is current value of a basket of goods and service divided by cost of same basket in base year and then multiplied by Mixed basket of goods used because prices can go up or down for reasons that have nothing to do with inflation. -Having a large group of representative items helps eliminate the effect of some products price dropping while others tend to be on the rise. -Base year can be any year. -Price index for the base year will always be Index values over 100 indicate inflation. -Index values under 100 indicate deflation. Please write down the 4 questions. Use the chart on the next slide to answer. 1. What is the highest that the overall unemployment rate has been according to the chart? 2. When was the unemployment rate highest for a African Americans? 3. Which group, historically, has had the lowest unemployment rate? 4. When was the overall unemployment rate at 10%? Chapter 12SectionMain Menu Define Gross Domestic Product, economic growth, unemployment, Consumer Price Index, Inflation, stagflation, and aggregate supply, and aggregate demand What are the four types of unemployment? Chapter 13SectionMain Menu Types of Unemployment Frictional Unemployment When people change jobs, get laid off, take time to find the right job after schooling, or take time off from working. Chapter 13SectionMain Menu Types of Unemployment Structural Unemployment When workers' skills do not match the jobs that are available. (technological advances) Chapter 13SectionMain Menu Types of Unemployment Seasonal Unemployment When industries slow or shut down or make seasonal shifts in production schedules Chapter 13SectionMain Menu Types of Unemployment Cyclical Unemployment Rises during economic downturns and falls when the economy improves Chapter 13SectionMain Menu Types of Unemployment Frictional Unemployment When people change jobs, get laid off, take time to find the right job after schooling, or take time off from working. Structural Unemployment When workers' skills do not match the jobs that are available. (technological advances) Seasonal Unemployment When industries slow or shut down or make seasonal shifts in production schedules Cyclical Unemployment Rises during economic downturns and falls when the economy improves Chapter 13SectionMain Menu Determining the Unemployment Rate The unemployment rate is the percentage of the nations labor force that is unemployed. Chapter 13SectionMain Menu Full employment is the level of employment reached when there is no cyclical unemployment. Full Employment An unemployment rate of around 4 to 6 percent is normal. Sometimes people are underemployed, (over-qualified, or working part- time). Discouraged workers (want a job, but have given up). Chapter 12SectionMain Menu Calculating Inflation ` Chapter 12SectionMain Menu Inflation Calculator 67 Lets see how real GDP is computed in an apple and orange economy. For example, if we wanted to compare output in 2002 and output in 2003, we would obtain base-year prices, such as 2002 prices. Real GDP in 2002 would be: (2002 Price of Apples 2002 Quantity of Apples) + (2002 Price of Oranges 2002 Quantity of Oranges). Real GDP in 2003 would be: (2002 Price of Apples 2003 Quantity of Apples) + (2002 Price of Oranges 2003 Quantity of Oranges). Real GDP in 2004 would be: (2002 Price of Apples 2004 Quantity of Apples) + (2002 Price of Oranges 2004 Quantity of Oranges). Graph of nominal vs. real 69 Nominal GDP measures the current dollar value of the output of the economy. Real GDP measures output valued at constant prices. The GDP deflator, also called the implicit price deflator for GDP, measures the price of output relative to its price in the base year. It reflects whats happening to the overall level of prices in the economy. GDP Deflator = Nominal GDP Real GDP GROSS DOMESTIC PRODUCT Gross= total Domestic= produced anywhere in the 50 states, by anyone Product= final goods and services NOMINAL VERSUS REAL GDP Nominal GDP- GDP measured in current prices Real GDP- GDP expressed in constant, or unchanging prices Nominal and Real GDP Year 1 Nominal GDP Suppose an economys entire output is cars and trucks. This year the economy produces: 10 cars at $15,000 each = $150, trucks at $20,000 each = $200,000 Total = $350,000 Since we have used the current years prices to express the current years output, the result is a nominal GDP of $350,000. In the second year, the economys output does not increase, but the prices of the cars and trucks do: This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP. 10 cars at $16,000 each = $160, trucks at $21,000 each = $210,000 Total = $370,000 Year 2 Nominal GDP 10 cars at $15,000 each = $150, trucks at $20,000 each = $200,000 Total = $350,000 To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices from the base year. So we calculate the real GDP for Year 2 using the prices from Year 1: Year 3 Real GDP Real GDP for Year 2, therefore, is $350,000 REAL AND NOMINAL GDP ECONOMIC GROWTH Economic growth is measured by finding real GDP per capita (real GDP divided by the total population) Real GDP per capita is considered the best measure of a nations standard of living. The basic measure of a nations economic growth rate is the percentage change of real GDP over a given period of time PER CAPITA GDP GDP divided by a countrys population OTHER INCOME AND OUTPUT MEASURES GDP is the primary measure of output Gross National Product (GNP)- the annual income earned by U.S. owned firms and U.S. citizens Depreciation (the loss of the value of capital equipment that results from normal wear and tear) is not taken into account AGGREGATE SUPPLY Aggregate Supply- the total amount of goods and services in the economy available at all possible price levels Economists add up the total supply of goods and services produced for sale in the economy (GDP) Calculate the price level (the average of all prices in the economy) As the prices of most goods and services change, the price level changes. Firms respond by changing their output (real GDP) Prices rise- production increases Prices fall- production decreases AGGREGATE SUPPLY AGGREGATE DEMAND Aggregate Demand- the amount of goods and services in the economy that will be purchased at all possible price levels Lower price levels means greater purchasing power for households; falling prices increase wealth and demand Higher price levels causes purchasing power to decline; reduction in the quantity of goods and services demanded AGGREGATE DEMAND AS/AD EQUILIBRIUM Aggregate Supply/Aggregate Demand Equilibrium= AS/AD Equilibrium Any shift in aggregate supply or aggregate demand will have an impact on real GDP and on the price level AGGREGATE DEMAND AND AGGREGATE SUPPLY LESSON Factors that shift an AD Curve Changes in Consumer Spending Investment Spending Government Spending Net Export Spending Increases in Aggregate Demand increase real GDP and the price level Decreases in Aggregate Demand decrease real GDP and price level AGGREGATE DEMAND AND AGGREGATE SUPPLY LESSON Factors that shift an AS Curve Changes in The prices of inputs (land, labor, capital, and entrepreneurship) Productivity Technology Government Regulations Increases in Aggregate Supply increase real GDP and lower the price level Decreases in Aggregate Supply decrease real GDP and raise the price level AD/AS AM I UNEMPLOYED? UNEMPLOYMENT 1. Structural 2. Cyclical 3. Frictional TYPES OF UNEMPLOYMENT Frictional Unemployment Occurs when people change jobs, get laid off from their current jobs, take some time to find the right job after they finish their schooling, or take time off from working for a variety of other reasons Structural Unemployment Occurs when workers' skills do not match the jobs that are available. Technological advances are one cause of structural unemployment Seasonal Unemployment (DO NOT NEED TO KNOW for EOCT) Occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules Cyclical Unemployment Unemployment that rises during economic downturns and falls when the economy improves STRUCTURAL UNEMPLOYMENT CYCLICAL UNEMPLOYMENT FRICTIONAL UNEMPLOYMENT WHAT IS UNEMPLOYED? People available for work who made a specific effort to find work in the past month and who during the most recent survey week, worked less than one hour for pay or profit. Also people who worked in a family business without pay for less than 15 hours a week. HOW IS UNEMPLOYMENT MEASURED? Its an important indicator of the health of the economy. Bureau of Labor statistics polls sample of population to determine how many are employed and unemployed. Unemployment rate is the percentage of nations labor force that is unemployed. It is only a national average its doesnt reflect regional trends. FULL EMPLOYMENT The level of employment reached when there is no cyclical unemployment (no one out of work because of downturn in the economy everyone who wants a job has one) 4-6% unemployment is normal. LIMITATIONS Figures dont count those who have become frustrated and stopped looking for work (have to have looked for work in the past 4 weeks) If you have a part time job you are considered employed even if you would rather have a full time job took this one because its all you could find. INFLATION CALCULAT OR Debt v. Deficit What is the national debt? What caused the national debt? Where does the government get the money when it wants to spend more than it takes in? What is a budget deficit? What is a budget surplus? Questions for You BUDGET DEFICITS AND THE NATIONAL DEBT Balanced Budget- a budget in which revenues are equal to spending The federal budget is almost never balanced Budget Surplus- a situation in which the government takes in more than it spends Budget Deficit- a situation in which the government spends more than it takes in THE NATIONAL DEBT National Debt- the total amount of money the federal government owes to bondholders The U.S. government is viewed as stable and trustworthy and can borrow money at a low interest rate THE DIFFERENCE BETWEEN DEFICITS AND DEBT Deficit- the amount of money the government borrows for one budget year Debt- the sum of all government borrow up to that time that has not been repaid SSEMA3 THE STUDENT WILL EXPLAIN HOW THE GOVERNMENT USES FISCAL POLICY TO PROMOTE PRICE STABILITY, FULL EMPLOYMENT, AND ECONOMIC GROWTH. a. Define fiscal policy. b. Explain the governments taxing and spending decisions. FISCAL POLICY Actions taken by the Federal Government to influence the economy (business cycles). HOW DO THEY DO IT? Taxation (revenue) Spending (expenditures) -transfer payments- HOW/WHEN/WHY If the economy needs a boost the Federal Government might: _______________ taxes. _______________ spending. HOW/WHEN/WHY If the economy needs to be cooled off the Federal Government might: _______________ taxes. _______________ spending. UNDERSTANDING FISCAL POLICY Fiscal policies are used to achieve economic growth, full employment, and price stability. Federal Budget- a plan for the federal governments revenues and spending for the coming year Lists expected income Shows how much money will be spent UNDERSTANDING FISCAL POLICY Fiscal Year- a twelve-month period that can begin on any date (October 1- September 30 for the Federal Government) FISCAL POLICY AND THE ECONOMY Expansionary Policies- fiscal policies, like higher spending and tax cuts, that encourage economic growth Used to raise the level of output in the economy Encourage growth Government spending increases aggregate demand FISCAL POLICY AND THE ECONOMY Contractionary Policies- fiscal policies, like lower spending and higher taxes, that reduce economic growth Used when demand exceeds supply to slow the growth of the economy (GDP) Used to slow or prevent inflation Leads to a decrease in aggregate demand which leads to lower prices LIMITS OF FISCAL POLICY The government cannot change spending for entitlements Difficult to know the current state of the economy (GDP) Even more difficult to predict future economic performance KEYNESIAN ECONOMICS John Maynard Keynes- The General Theory of Employment, Interest, and Money Comprehensive explanation of economic forces Told economists and politicians how to get out of economic crises and how to avoid them Focused on the economy as a whole Productive Capacity- the maximum output that an economy can produce without big increases in inflation Demand-Side Economics- the idea that government spending and tax cuts help an economy by raising demand KEYNESIAN ECONOMICS Keynesian Economics- a form of demand-side economics that encourages government action to increase or decrease demand and output Fiscal policy should be used to fight periods of recession/depression and periods of inflation Advocated the use of expansionary and contractionary fiscal policies Multiplier Effect- the idea that every one dollar of government spending creates more than one dollar in economic activity SSEMA2 THE STUDENT WILL EXPLAIN THE ROLE AND FUNCTIONS OF THE FEDERAL RESERVE SYSTEM. a. Describe the organization of the Federal Reserve System. b. Define monetary policy. c. Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic growth. FEDERAL RESERVE ACT OF 1913 Created the Federal Reserve System Composed of 12 independent regional banks Could lend money to other banks in times of need STRUCTURE OF FEDERAL RESERVE SYSTEM Board of Governors- the seven-member board that oversees the Federal Reserve System Appointed for staggered 14 year terms (keeps members from being pressured politically) President picks a chair for a 4 year term from the board of governors STRUCTURE OF THE FEDERAL RESERVE SYSTEM Federal Reserve Districts- the twelve banking districts created by the Federal Reserve Act (one Federal Reserve Bank is located in each district) All nationally charted banks are required to join the Fed Member banks own shares in the Fed and therefore gives the system of high degree of political independence MONETARY POLICY MONETARY POLICY DVD MONETARY POLICY The actions the Federal Reserve (Central Bank) takes to influence the level of GDP and the rate of inflation in the economy. HOW DO THEY DO IT? Tools of the FED 1.Open Market Operations 2.Discount Rate (Fed to Banks) 3.Federal Funds Rate (bank to bank 4.Reserve Requirements TOOLS OF THE FEDERAL RESERVE Open Market Operations- the buying and selling of government securities to alter the money supply Bond Purchases - In order to increase the money supply, the Federal Reserve Bank of New York buys government securities on the open market. Bond Sales- When the Fed sells bonds, it takes money out of the money supply. Discount Rate (Federal Reserve to Bank)- the interest rate that banks pay to borrow money from the Federal Reserve TOOLS OF THE FEDERAL RESERVE Federal Funds Rate (bank to bank)- the interest rate that banks pay to borrow money from each other Reserve Requirement- the amount of money that a bank must keep on hand; set by the Federal Reserve Fiscal and Monetary Policy Tools Fiscal policy toolsMonetary policy tools 1.increasing government spending 2. cutting taxes Expansionary tools 1.open market operations: bond purchases 2. decreasing the discount rate 3.decreasing reserve requirements Contractionary tools 1.decreasing government spending 2. raising taxes 1.open market operations: bond sales 2. increasing the discount rate 3.increasing reserve requirements FISCAL AND MONETARY POLICY TOOLS HOW/WHEN/WHY If the economy needs a boost the Federal Reserve might: _______________ bonds. _______________ interest rates. _______________ reserve requirements. HOW/WHEN/WHY If the economy needs to be cooled off the Federal Reserve might: _______________ bonds. _______________ interest rates. _______________ reserve requirements.