Governmental Economics

The Federal Reserve

Central bank of the United States. Regulates the economy by controlling the amount of money in circulation throughout the U.S.

Inflation – A general increase in prices and fall in the purchasing value of money

●

Caused by too much money being in circulation

Inflation

Too much inflation means prices go way up
Too much unemployment prices go way down.

It’s the Fed’s job to control the economy by adjusting monetary policy - this helps keeps unemployment and inflation low

Monetary Policy = Banks Financial decisions; Specifically, the FED’s decisions

Ex: Lower interest rates

Fiscal Policy = Our government’s financial decisions

Ex: Give out stimulus checks to citizens

Inflation Issues

1.

When inflation is too high there is too much money in circulation. Prices go up and purchasing power goes down

- If you all somehow hit the lottery today, would businesses in town still charge the same amounts?

2.

When inflation is too low there is not enough money in circulation, unemployment is high.

- Unemployment is bad for the economy - It can't grow without workers like a team cant win without players

How do we deal with inflation?

There are 3 common ways the FED deals with inflation

1.

Adjust Interest Rates

2.

Adjust Reserve Rates

3.

Buy/Sell Government Bonds

Interest Rate or Discount Rate

Amount of money a borrower pays as a fee for taking out a
loan.

●

Lower interest rates make you more likely to take
out a loan and spend that money in the economy

●

Higher interest rates make you less likely to take out
a loan

You want to buy a car. Which is better?

$20,000 with a 10% interest
charge

$20,000 with a 50% interest
charge

You want to buy a car. Which is better?

$20,000 with a 10% interest
charge

$22,000 total

$20,000 with a 50% interest
charge

$30,000 total

You want to buy a car. Which is better?

Lower interest rates make you more likely to take out a loan and spend money

Higher interest rates make you less likely to take out a loan and spend money. Maybe I’ll buy the car next year

(Bank) Reserve Rate

One way banks make money is by loaning out the money you deposit into your account.

The reserve rate is the percentage of money a bank must keep out of every deposit someone makes

●

The more money they keep inside the bank, the less money they have to loan out

●

The less money they have to keep in the bank, the more they have to loan out.

Which scenario puts more money out into the economy to be spent?

You make a $100 deposit
into the bank and there is a
10% reserve rate. The bank
keeps $10 of your deposit
and loans out $90 to its
members.

You make a $100 deposit
into the bank and there is a
50% reserve rate. The bank
keeps $50 of your deposit
and loans out $50 to its
members.

$90
to

loan
out

$10

$50
to

loan
out
$50
stays

in

bank

Stays in bank

Government Bonds

A loan (I.O.U.) that you give to the government

Ex:

●

You buy a government bond to help fund a military project.

●

You pay $1000 to the government now

●

The government pays you $50 a year for 10 years (agreed upon length of time)

●

After 10 years the government repays you the initial $1000 you invested

How A Governement Bond Works

​(Like a dividend/interest payment)

Bond Rates

Fight Unemployment

(Not enough money)

• Lower interest rates

• Lower reserve requirement

• FED buys government bonds - Injects money into the government
  

Fight Inflation 

(Too much money in the economy)

• Raise interest rate

• Raise reserve requirement

• FED sells government bonds - Take  money out of government

Stimulate - Think business, buying and selling goods, trading.

Slow - Think saving, not buying and selling goods, unemployment.

• Interest rates go down

• You sell your car

• You sell government bonds

• You put all of your money in the bank

• Reserve rates go down

• You put an addition on your house

• You open a new business in town

• Interest rates go up

• You spend $100 at Walmart

• You buy a government bond

• You win $100 and put it under the bed

• Reserve rates go up

Stimulate - Think business, buying and selling goods, trading.

Slow - Think saving, not buying and selling goods, unemployment.

• Interest rates go down

• You sell your car

• You sell government bonds

• You put all of your money in the bank

• Reserve rates go down

• You put an addition on your house

• You open a new business in town

• Interest rates go up

• You spend $100 at Walmart

• You buy a government bond

• You win $100 and put it under the bed

• Reserve rates go up