PLS 200-05

Economic Policy & Issues: US = Capitalism

individual control of the means of production (Communism: State control)

Tools of Economic Policy

  1. fiscal policy
    • taxation & spending of money
    • annual cycle under control of President
    • budget deficit: spending exceeds revenue
    • budget surplus: revenue exceeds spending
    • balanced budget: revenue = spending
  2. monetary policy
    • regulates money in circulation
    • controlled by Federal Reserve Board
      • private entity est. 1913
      • not responsible to electorate
      • goal: provide stable currency
      • goal: provide stable economic environment
      • supervises operation of commercial banks
      • 12 member board
      • 12 regions of FR Banks
      • 5400 commercial banks
      • sets requirements for bank reserves
      • reserve increases impact availability of money for distribution
      • set funds rate/federal funds rate: percentage charged on loans to commercial banks (line of credit to commercial banks)
      • sets discount rate: short term overnight loans to comm. banks
      • consumer rates impacted by last two above
      • regulates open market committee: day to day function of investsment mkts
  3. regulatory policy

Community Reinvestment Act

  • increase in loans to consumers
  • higher risk loans = higher interest% OR higher premium
  • adjustable mortgage rates
  • loans in default sold to secondary market
  • Exchange Rates

  • fixed rate system: $1 US = ? lb UK
  • floating exchange system: unstable
  • “dirty” floating system: fluctuation within certain parameters acceptable, above or below benchmark prompts action
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