unit 2: the government, banking and the economy. who in government has the responsibility to respond...
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Unit 2: Unit 2: The Government, The Government, Banking and the Banking and the EconomyEconomy
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Who in government has the responsibility to respond when the economy is in trouble?
The President?Congress?The Fed?
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Keeping watch over…
THE BUSINESS CYCLE
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The Business Cycle
Contraction vs. Expansion Peak vs. Trough Recession vs. Depression
Recession Characteristics…2 Quarters declining GNP6-18 monthsunemployment rates risestable (or declining) prices
Why & How does this happen?
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Variables that determine the Business Cycle… WHY ???
Business InvestmentsInterest rates & CreditConsumer expectationsExternal shocks
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Business Investments
Investment spending increases GDP and maintains expansion - growth
Business cuts leads to a decline in aggregate (total) demand & GDP slows/contracts- recession
Business cuts causes a reduction in output & income in other sectors & GDP slows/contracts- recession
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Interest Rates & Credit
Business and consumers’ spending are influenced by rates and availability of creditAs rates climb, or loans become hard to get, spending and investment dries up, as does job growth
(CONTRACTION – RECESSION)
This is what happened throughout 2009 after many big banks collapsed!
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Consumer expectations
Expectations breed fear or hope…Consumers expect layoffs – stop spending!Consumers expect raises – spend more!
Consumer expectations become self-fulfilling prophesies
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External shocksSome factor indirectly has an impact on the economy…
Drought, war, oil embargo, etc. can affect aggregate supply
As supply changes, so does production and price, thus impacting GDP (1970s OPEC Oil crisis)
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Who in government has the responsibility to respond when the economy is in trouble?
The President?Congress?The Fed?
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Monetary Policy
Controlled by the Federal ReserveFederal Reserve The Bank for Banks Board of Governors, Regional Banks Janet Yellen
Goal: To expand or contract the amount of Goal: To expand or contract the amount of money in supply so as to control spending and money in supply so as to control spending and inflation and manage the business cycleinflation and manage the business cycle
Three Methods Interest rates Open Market Operations Reserve requirement
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2009
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http://www.pbs.org/newshour/making-sense/how-candid-should-janet-yellen-be-watching-emerging-markets-overreact-to-fed-transparency/
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Monetary PolicyThe Federal Reserve’s attempt to control the business cycle
How… track the economic indicators, and control the amount of money in supply
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how does the FED know when these events are taking place??
Economic Indicators
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Economic Indicators Unemployment
Types: Frictional (always exists)seasonal structural (changing society) cyclical (accd. to business cycle)
InflationChanges to the Consumer Price Index
Economic GrowthGross National / Domestic Product
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Define the three methods of Monetary Policy… Open Market Operations Discount rate Reserve requirement
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Interest Rates (Discount Rate)
The rate the Fed charges banks to borrow money
Lower the rate – expansionary Raise the rate - contractionary
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Mortgage Calculator
Interest Rates
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Open Market Operations
The Fed’s buying and selling of US securities (bonds) to add or subtract from the reserves of the nation’s banking system
Purchase of bonds – expansionary Sale of bonds - contactionary
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Reserve Requirements
The fraction of money (based on total money) banks are required to keep on reserve
The amount of money banks ‘have on hand’ – or can’t loan out to borrowers
Set as a % Lower the percentage – expansionary Raise the percentage – contractionary
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Practice scenarios…
7% Inflation4% Unemployment3% GNP Growth Rate
10% Unemployment-2% GNP Growth 2 %inflation
6 % Inflation9 % Unemployment
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FISCAL POLICY
Other alternatives…
Who else is responsible?
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Fiscal Policy
Congress/President adjust federal taxes and federal spending
Meant to control aggregate demand and sometimes aggregate supplyLike monetary policy, it can be expansionary
or contractionary Intended to monitor and adjust the
Business cycle
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Circular flow…includes the government…
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When and how does the Government enact an expansionary fiscal policy? When? During a Recession or …
high unemployment, low business and consumer spending, declining GNP
How? Government raises aggregate demand by becoming a
major consumer (spending) Government cuts taxes, thus raising aggregate demand, or
allowing people more disposable income Problems/Controversy?
National debt/deficit Where is the money going?
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When and how does the Government enact an contractionary fiscal policy?
When? Economy is growing quickly – Inflation results How?
Government lowers aggregate demand by cutting government spending
Government raises taxes, thus lowering aggregate demand, or decreasing the amount of personal disposable income
Problems/Controversy? What programs should be cut by the government?
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Examining trends
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U.S. federal spending as a percentage of gross national product from 1790 to 1990.
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