Economic Policy and The Budget Process

I. Economic PolicyA. Monetary v. Fiscal Policy 1. The government uses monetary policy to influence the economy by adjusting interest rates and controlling the money supply and fiscal policy to manage the economy by adjusting the governments budget.

II. Fiscal PolicyA. Keynes v. Supply-side economics.

1. Keynesian economics- encourages borrowing and spending to stimulate the economy.

a. government must regulate the economy, distribute and redistribute.

2. Supply side- Low taxes, little regulations and redistributions. Allow the wealthy to gain more money so they can invest in the economy and create jobs.

B. The Budget1. The budget process involves both the President

and Congress.a. The primary decisions are related to taxes, spending and borrowing.How might divided government cause

problems?

Federal Agencies Submit detailed proposals outlining their expenses for the next year to the Office of Management and Budget (OMB).

The OMB revises many of the recommendations and prepares a budget for the President to submit to Congress

The Congressional Budget Office (CBO) evaluates the budget and sends a report to the House and Senate budget committees.

The appropriations committees of each house review the budget and submit resolutions to their chambers.

A Common Budget Direction must be passed by April 15th

2. The Fiscal YearA. The Fiscal year begins October 1st, each house must

pass a budget that includes 13 major appropriations. B. If these bills are not passed, Congress must then pass

emergency spending legislation, called a continuing resolution (CR) to avoid a shutdown of any department that did not receive funding.

C. If Congress does not due this the government shuts down.

3. Taxes/RevenueA. The US has a progressive tax system.B. The federal government raises more money from

individual income taxes than from any other source.

4. SpendingA. 2/3 of the of the federal budget is mandatory

spending. 1. This includes paying the debt and

entitlement programs such as social security.B. 1/3 of the budget is discretionary.

1. ½ of discretionary spending goes to defense2. The rest goes to everything else.3. Because only a small part of the budget is discretionary it is difficult to control spending without reducing the cost of entitlement spending.

II. Monetary PolicyA. The Federal Reserve (FED) was created in 1913 to

control monetary policy.1. The FED is truly an independent agency.

a. Neither Congress or the President directly control the FED. The agency funds itself through interest on loans it gives out.

B. Adjusting Interest Rates1. The Fed will raise interest rates when they want to discourage spending.

-Usually during times of inflation or excessive demand. 2. The FED will lower interest rates when they want to encourage spending.

-Usually during times of recession

President Obama’s proposal for fiscal year 2015.

C. Setting interest rates is not simply a matter of managing the economy but a political one rewarding some groups at the expense of others.

C. Setting interest rates is not simply a matter of managing the economy but a political one rewarding some groups at the expense of others.

What level of interest rates would this person favor?

C. Setting interest rates is not simply a matter of managing the economy but a political one rewarding some groups at the expense of others.

What level of interest rates would this person favor?Wealthy Business Owner

C. Setting interest rates is not simply a matter of managing the economy but a political one rewarding some groups at the expense of others.

What level of interest rates would this person favor?The Working Class

C. Setting interest rates is not simply a matter of managing the economy but a political one rewarding some groups at the expense of others.

What level of interest rates would this person favor?Entrepreneur starting a new business

C. Setting interest rates is not simply a matter of managing the economy but a political one rewarding some groups at the expense of others.

What level of interest rates would this person favor?

C. Controlling the Money Supply1. Open Market Operations- Buying and Selling of

government securities (Bonds)A. When the Fed buys bonds it puts more

money into circulation.B. When the Fed sells bonds it withdrawals

money from the economy.

2. Reserve requirements- The Fed also sets the reserve rates that banks must hold on deposits.

a. In other words the FED tells banks how much money they can loan out and how much they much keep in reserve.

Review

What is Monetary Policy?

Name the Three ways the FED controls Monetary Policy.