Policy Makers and the Money Supply_eng..pptx

What are the policy makers in the US and what are the money suppliers in the US

1. Policy Makers and the Money Supply Mrs. WAJEEHA BATOOL, MSc ECONOMICS AND ADMINISTRATIVE SCIENCES ALA-TOO INTERNATIONAL UNIVERSITY

2. Key Points Describe the U.S. national economic policy objectives and possible conflicts among these objectives. Identify the major policy makers and describe their primary responsibilities. Discuss how the U.S. government influences the economy and how the government reacted to the 2007–09 perfect financial storm. Describe the U.S. Treasury’s cash and general management responsibilities. Describe the U.S. Treasury’s deficit financing and debt management responsibilities. Discuss how expansion of the money supply takes place in the U.S. banking system.

3. National Economic Policy Objectives Hemingway argued against currency inflation and war, highlighting the government's role in achieving economic growth and stable prices. The Employment Act of 1946 and Humphrey-Hawkins Act outline the U.S. government's focus on economic growth, employment, and price stability, along with stability in interest rates and markets.

4. Economic Growth The standard of living in the United States has significantly increased due to economic growth and productivity. Growth involves increasing the stock of productive resources, improving technology, and skills. The output of goods and services in an economy is referred to as the gross domestic product (GDP). The US experienced a double-dip recession in the 1980s, followed by a mild downturn in the mid-1990s. Despite downsizing and restructuring, the economy continued to grow in real terms. However , economic growth slowed in the 20th century, leading to a recession in 2001. Economic recovery began in 2002 and continued until the Great Recession of 2008-09.

5. High Employment Unemployment in the U.S. has been a significant issue since the early 1980s, reaching double-digit levels in the late 1980s. The government aims to promote stability in employment and production, avoiding significant changes in economic activity. However , the recession in mid-1990 led to a 7.5% unemployment rate in 1992, and the rate continued to rise in the 1990s. Despite economic recovery in 2002, the unemployment rate remained above 10% by 2010, but has since been reduced to below 5% in early 2016.

6. Price Stability Stable prices are crucial for economic goals and discourage investment. However, inflation, when prices of goods and services do not match the quality of goods and services, discourages investment. High inflation rates are no longer acceptable for high employment levels. Inflation levels were high in the 1980s, but declined during the 1981-1982 recession. The Federal Reserve increased its federal funds rate target in 2004 to address inflation concerns. The Fed reduced its target to near zero in 2008, but inflation rates remained below 2% through 2016.

7. Domestic and International Implications National economic policy objectives can sometimes conflict, as rapid growth can lead to higher inflation and higher unemployment, while slow growth can result in lower prices. Policy makers must balance these goals while establishing economic policies. A country's actions also influence other nations' economies, so maintaining a worldview is crucial. Countries with more exports than imports have a net trade surplus, which must be balanced by positive net financial transactions and foreign exchange operations.

8. Four Policy Maker Groups Four groups of policy makers are actively involved in achieving the nation’s economic policy objectives: Federal Reserve System The president Congress U.S . Treasury

9. Policy Makers and Economic Policy Objectives This illustrates how the four groups use monetary and fiscal policies, supported by debt management practices, to carry out the four economic objectives of economic growth, stable prices, high employment, and balance in international transactions.

10. Government Influence on the Economy The federal government provides efficient social and economic services to the public and regulates the economy, requiring coordination among policymakers to achieve national economic objectives . Federal Budget: Annual revenue and expenditure plans that reflect fiscal policy objectives concerning government influence on economic activity. B udget Surplus: O ccurs when tax revenues (receipts) are more than expenditures ( outlays). B udget Deficit: Occurs when tax revenues (receipts) are less than expenditures (outlays)

11. Government Influence on the Economy The government's impact on the economy is complex, with federal deficits affecting both the economy and private investment. Government competition absorbs savings and raises interest rates, while deficits stimulate economic activity by spending more or collecting less taxes, leaving more income for consumers. This stimulates aggregate demand and generates extra income and savings.

12. Government Influence on the Economy During war-related budget deficits, the Fed monetized debt by buying government securities to finance the deficit and increase bank reserves. Today , this activity is avoided due to counter-current monetary policy and financial market impact, making it difficult for borrowers.

13. Government Influence on the Economy Fiscal policy is developed and implemented by the president and Congress, with the Treasury responsible for collecting taxes, disbursing funds, and debt management. The Federal Reserve (Fed) contributes to the nation's economic goals by formulating monetary policy, regulating the growth of the money supply and influencing interest rates and loan availability.

14. Government Influence on the Economy The Fed's primary responsibilities have not always been the same, with the Treasury taking over primary responsibility for managing federal debt and trust funds. The debate over the balance between full employment and price stability continues, with each objective having its supporters. Economic objectives are subject to compromise and trade-offs.

15. Treasury Cash and General Management Responsibilities The U.S. Treasury supports economic growth, oversees currency production, collects taxes, pays bills, manages cash balances, and borrows funds for budget deficits. It played a crucial role during the 2007-09 financial crisis by assisting in financial institution mergers and enforcing government legislation to prevent financial institutions and businesses from failing.

16. Treasury Cash and General Management Responsibilities Treasury operations must be neutral in their impact on money and credit supply. The Fed regulates the money supply, but close cooperation is necessary to avoid disruption. A massive tax withdrawal could disrupt the banking system's ability to serve public credit needs. However, the federal government claims taxes periodically without significant impact on lending institutions. The Treasury focuses on taxing, borrowing, paying bills, and refunding maturing obligations, minimizing interference with monetary affairs.

17. Managing the Treasury’s Cash Balances Treasury operations involve spending over $3 trillion a year. It is necessary to maintain a large cash balance, since Treasury receipts and payments do not occur on a regular basis throughout the year. This makes it critical for the Treasury to handle its cash balances in such a way that it will not create undesirable periods of credit ease or tightness. To affect bank reserves as little as possible, the Treasury has developed detailed procedures for handling its cash balances.

18. Powers Relating to the Federal Budget and to Surpluses or Deficits The government indirectly influences monetary and credit conditions through taxation and expenditure programs, with significant cash deficits or surpluses. Congress makes budget-making decisions, with government income and spending being crucial for determining credit conditions.

19. Treasury Deficit Financing and Debt Management Responsibilities The U.S. government collects taxes and makes expenditures for national defense and social programs. A budget surplus occurs when receipts exceed outlays, while a deficit occurs when outlays exceed receipts. Debt financing involves selling Treasury securities to cover revenue shortfalls. Large deficits can lead to government competition and crowding out . Crowding out occurs when there is a lack of funds for private borrowing due to the sale of Treasury securities to cover budget deficits.

20. Treasury Deficit Financing and Debt Management Responsibilities National debt total debt owed by the government. D ebt management involves funding budget deficits and refinancing maturing Treasury securities used to fund the national debt.

21. Changing the Money Supply The M1 money supply comprises currency, demand deposits, other checkable deposits, and traveler's checks. Currency is Federal Reserve notes backed by gold certificates, Special Drawing Rights (SDRs), eligible paper, or U.S. government and agency securities. Demand deposits at commercial banks, savings banks, and credit unions make up about half of the M1 money supply. The banking system in the U.S. can change the volume of deposits as the need for funds changes.

22. Changing the Money Supply This is based on a fractional reserve system, where banks must hold funds in reserve equal to a certain percentage of their deposit liabilities. To understand deposit expansion and contraction, it is important to distinguish between primary deposits and derivative deposits. Banks must maintain reserves against both primary and derivative deposits.

23. Primary and Derivative Deposit Primary deposit is the deposit that adds new reserves to a bank. D erivative deposit is the deposit of funds that were borrowed from the reserves of primary deposits.

24. Factors Affecting Bank Reserves The level of a bank's excess reserves impacts deposit expansion and the size of the money supply. Bank reserves for a depository institution are vault cash and funds held at the Federal Reserve Bank. Bank reserves can be divided into required reserves and excess reserves. Excess reserves occur when the amount of a depository institution's bank reserves exceeds required reserves, while deficit reserves occur when required reserves are larger than the bank reserves.

25. Factors Affecting Bank Reserves The banking system has excess reserves if the cumulative amount of bank reserves for all depository institutions exceeds the total required reserves amount.

26. Factors Affecting Bank Reserves Reserve balances are affected by a variety of transactions involving the Fed and banks, and that may be initiated by the banking system or the Fed, the Treasury, or other factors. Although the Fed does not control all of the factors that affect the level of bank reserves, it does have the ability to off set increases and decreases. Thus, it has broad control over the total reserves available to the banking system.

27. Transactions Affecting Bank Reserves

28. The Monetary Base and the Money Multiplier Monetary base banking system reserves plus currency held by the public money. M ultiplier number of times the monetary base can be expanded to produce a given money supply level.

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