warm-up: (1)what is debt? (2) how does the government spend money when they are in debt?

Warm-Up:

(1)What is debt?(2) How does the government spend

money when they are in debt?

Making Fiscal Policy & Monetary Policy

United States Fiscal Policy

• Fiscal policy is the federal government’s use of taxing and spending to keep the economy stable.

Important DefinitionsCapital Deepening-process of increasing the amount of capital per worker (p. 320)Cost-Push Theory-theory that inflation occurs when producers raise prices to meet increased costs (p. 341)Crowding-Out Effect-the loss of funds for private investment due to government borrowing (p. 406)Market Basket-a representative collection of goods and services (p. 339)

Federal Budget

A document written every year (fiscal year) that projects government revenue and authorizes where that money is spent.Congress writes the budget

The federal budget for FY 2009 is $3.1 trillionThe federal budget for FY 2010 is $3.6 trillion

Federal agencies send requests for money to the Office of Management and Budget.

The Office of Management and Budget works with the President to create a budget. In January or February, the President sends this budget to Congress.

Congress makes changes to the budget and sends this new budget to the President.

The President signs the budget into law.

The President vetoes the budget. If Congress cannot get a majority to override the President’s veto, Congress and the President must work together to create a new, compromise, budget.

2⁄3

The Budget ProcessThe Budget Process

*Congress and the

White House work

together to

develop a

federal budget

.

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Surplus, Deficits, & Balance

A budget surplus occurs when revenues exceed expenditures. A budget deficit occurs when expenditures exceed revenues. A balanced budget occurs when revenues are equal to spending.

Debt vs. Deficit

The difference between debt and deficit:

The federal deficit is the amount that the government owes from one fiscal year to the next. The national debt is the total amount the government owes from all years.

• It is owed to people/business who own US savings bonds, treasury bills, bank notes.

Responding to Budget DeficitsCreating Money

The government can pay for budget deficits by creating money. Creating money, however, increases demand for goods and services and can lead to inflation.

Borrowing MoneyThe government can also pay for budget deficits by borrowing money.The government borrows money by selling bonds, such as United States Savings Bonds, Treasury bonds, Treasury bills, or Treasury notes. The government then pays the bondholders back at a later date.

The National Debt

The national debt is the total amount of money the federal government owes. The national debt is owed to anyone who holds U.S. Savings Bonds or Treasury bills, bonds, or notes.

http://www.usdebtclock.org/

National Debt Graph: Bush Sets 50-Year RecordClick image below to enlarge.

Is the Debt a Problem?Problems of a National DebtProblems of a National Debt

To cover deficit spending the government sells bonds. Every dollar spent on a government bond is one fewer dollar that is available for businesses to borrow and invest. This encroachment on investment in the private sector is known as the crowding-out effect.The larger the national debt, the more interest the government owes to bondholders. Dollars spent paying interest on the debt cannot be spent on anything else, such as defense, education, or health care.

State of New YorkGDP=$822 billion per year (11th largest economy in the world)NYS ranked fourth in the nation in attracting new and expanded corporate facilities (investment)NYS ranked third in the nation for international investment (behind Californai and Texas)NYS ranked 1st in the nation in the number of Fortune 500 companies headquarters (54 in NYS)

State of New York (Continued)

NYS is ranked 3rd in the nation for high technology employmentNYS ranked 1st in the nation for number of 1st tier universities“the state could become the Silicon Valley of nanotech” Forbes/Wolfe Nanotech report (2003)

Monetary Policy & the Monetary Policy & the Federal Reserve SystemFederal Reserve System

What is Monetary Policy?

Actions that the Fed takes to influence the level of real GDP and the rate of inflation in the economy

What is the Fed?Chairman Ben BernankeThe Government’s Bank

Maintains the Treasury Department's checking account, and clears checksReserve Board has great control because it has power to regulate the money supply

As RegulatorsSupervise and regulate the nation's banks to ensure their financial soundness and are following banking, consumer, and other laws.

As LendersAs Lenders

• Provides credit to depository institutions

• Lender of last resort to the nation's banks

• If banks or other FDIC banks are forced to close, depositors are protected by the FDIC up to the legal limit of $250,000 per depositor until January 2013.

• 99 banks have failed since September 2008.

•most critical role is to keep the economy healthy through the proper application of monetary policy

•to promote stable prices maximum sustainable employment and steady economic growth

Ticket-Out-the-Door:

•Which areas of spending would you increase and decrease?•As the economic situation improves what can you expect to be the situation with lending (less or more).