Chapter 18: Economic Policy

Chapter 18: Economic Policy
Part II (p. 659-685)
Monetary Policy: Controlling the
Money Supply
• Monetary Policy
– A form of government regulation in which the nation’s
money supply and interest rates are controlled
• Money
– A system of exchange for goods and services that
includes currency, coins and bank deposits
• Federal Reserve: Board of Governors
– A seven-member board that sets member banks’
reserve requirements, controls the discount rate, and
makes other economic decisions
Monetary Policy: Controlling the
Money Supply
• Reserve requirements
– Governmental requirements that a portion of member
banks’ deposits must be retained to back loans made
• Discount rate
– The rate of interest at which member banks can borrow
money from their regional Federal Reserve Bank
• Open Market Operations
– The buying and selling of government securities by the
Federal Reserve Bank in the securities market
The FRB and the Executive and
Legislative Branches
• President shares responsibility for fiscal
policy with Congress
• Congress authorizes the FRB to make
monetary policy
• But there are many formal and informal
contacts between the White House and
the FRB
Fiscal Policy: Taxing and
• Fiscal policy:
– Federal government policies on taxes, spending, and debt management
– Intended to promote the nation’s macroeconomic goals, particularly with
respect to employment, price stability, and growth
• Keynesian theory
• Discretionary fiscal policy: deliberate decisions by the
president and Congress to run budget surpluses or deficits
– John F. Kennedy first to apply fiscal policy theory
• Revenue Act of 1964
– Reduced personal and corporate income tax rates
• Tax cuts to stimulate the economy
– Reagan in 1981 and G.W. Bush in 2001 and 2003
The Effects of Globalization
• International economy
– Increased competition benefits consumers
– Expands the market for American products
– Labor unions are strongest critics of free trade
• Stress need to restrict “dumping”
• Fair trade rather than free trade
– Analysis suggests that globalization further segments
the market into winners and losers.
• Losers tend to be smaller businesses and workers.
The Budgetary Process
• Federal government raises money from:
Individual income taxes
Social insurance
Retirement receipts
Corporate income taxes make up less than 10
percent of receipts
• Most government spending goes toward:
– National defense
– Human resources
Congress and the Budgetary
• Budget and Accounting Act of 1921
– Gave the president authority to prepare an annual budget
and submit it to Congress
• Staff agency now called the Office of Management and
Budget was created to assist the president in this
• President sends budget proposal to Congress in January
or February of each year
• Congress and the appropriations committees actually
provide the funding needed to carry out programs.
– Budget and Impoundment Control Act of 1974
The Budget Deficit and the Debt
• Federal budget deficit
– The amount by which federal expenditures exceed
federal revenues
• Gross domestic product (GDP)
• The total market value of all goods and services
produced in a country during a year
• Deficit reduction legislation
– Gramm-Rudman-Hollings Act of 1985
– Budget Enforcement Act of 1990
• Budget surplus 1998
– Balanced Budget: the revenue meets or exceeds
The Economics of
Environmental Regulation
• Since the 1970s, Congress
has enacted a large volume
of pollution control
• Clean Air Act
• Clean Water Act
• Toxic Substance Control
• Implementation of these
laws rests primarily with the
Environmental Protection
The Environmental Protection
• Nation’s largest regulatory agency
– Works with state agencies to enforce environmental
• Three major eras of EPA’s political life
– 1970s: organizational growth
– 1980s: Reagan administration and hostility toward
EPA goals; budget cuts
– 1983 onward: increase in budget and staff; focus on
balance between environmental protection and
economic costs