the structure of the federal reserve. board of governors federal reserve bank member banks federal...
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The Structure of the Federal Reserve
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Board of Governors
Federal Reserve Bank
Member Banks
Federal Open Market Committee
(FOMC)Advisory Councils
The structure of the federal reserve
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The Federal Reserve System
• Created in 1913Board of Governors•Made up of 7 individuals• Appointed by the President for one 14-yr term•Must be approved by the Senate• One members term expires every 2 years• Chairman Janet Yellen
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Do all banks belong?
• No• To join, banks must purchase stock in its
Federal Reserve district bank
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How does the fed it operate?
•Main function is to control money supply
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Reserve Requirement
• A set percentage of deposits a bank must keep on reserve• Anywhere between 3 – 14%• Controlling the money supply:
• Increase supply decrease RR (reserve requirement)• Decrease supply increase RR
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Discount Rate
• The interest rate the Fed charges member banks to borrow•When the prime rate or discount rate
changes, all interest rates will change• Controlling the money supply:
• Increase supply decrease DR (discount rate)• Decrease supply increase DR
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Federal Open Market Operations (fomo)
• Buying and selling securities• The Fed is the nation’s owner of securities• Controlling the money supply:
• Increase supply buy securities• Decrease supply sell securities
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The Federal Reserve constantly monitors ______________. It will increase or decrease the money supply by increasing or decreasing the interest rates. The ________________ reacts to decisions by the ____________________.
INFLATION
FEDERAL RESERVESTOCK MARKET
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THE BUSINESS OF BANKS
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The Role of Banks
• Banks are a business with the same profit making goals of any other business. • They make a profit by providing services
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Role of banks
1. They provide safety and interest income for depositors
2. A source of loans for people in business3. How does a bank make a profit?
a. By charging higher rates of interest to borrowers then they pay to
depositors b. Credit cards
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Bank assets and liabilitiesAn asset is something
you own
a. Loansb. Bondsc. Real estated. Cash reserves
Liabilities are something you owe.
a. Checking and saving account deposits
b. Loans from the Federal Reserve
c. Money owed to stockholders
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Federal Deposit Insurance Corp.
Why created?1. Stop runs on banks
How much?2. $250,000
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Competition for banks
1. Tax shelters, 401K plans, Roth IRA’s2. The Stock Market3. Credit Unions
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MODERN BANKING
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Common loans banks make
Mortgage•Real estate•Lender & borrower •Monthly •Lender
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Credit Cards
•Issued by banks to users•Pays; lends•Repaying
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BANKING DEREGULATION
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Bank Mergers
• Larger banks acquired smaller ones• Small ones joined forces to enter different
geographic locations
BENEFITS
Increased competition which keeps interest
rates low.
Increase in the number of bank branches.
CONS
More banks to choose from.
Big banks show less interest in individual
customers.
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Financial Services Act 1999
•Allowed banks to sell stocks, bonds, and insurance •Didn’t really work out
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Technology & Banking
ATM’s• Allows you to make transactions without
seeing a bank officerDebit Cards•Withdraws money right from your accountStored-value cards• AKA gift cards
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TAX BASES & STRUCTURES
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Most Common Tax Bases
• Individual income tax•Corporate income tax•Sales tax•Property tax
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Individual Income Tax
• Tax based on an individual’s income from all sources
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Corporate Income Tax
• Tax based on a corporation’s profits
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Sales Tax
• Tax based on the value of goods or services at the time of sale.
http://www.tax.ny.gov/pdf/publications/sales/pub718.pdf
http://www.earthodyssey.com/sales_tax.html
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Property Tax
• Tax based on the value of an individual’s or business’s assets, generally real estate.
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TAX STRUCTURES
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Proportional Tax
• Takes the same % of income from all taxpayers regardless of how much they make• “FLAT TAX”
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Progressive Tax
•Places a higher % rate of taxation on higher-income earners • The Federal Income tax
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Regressive Tax
• Takes a larger % of income from people with lower incomes
SALES PROPERTY
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Why tax incentives?
• The gov’t may encourage behavior that it believes is good for the economy and for society
http://thehotellafayette.com/
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What is a sin tax?
• Taxes imposed on products or activities considered to be unhealthful or damaging to society
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Withholding
•Money taken from a worker’s pay before the worker receives it•Also called the payroll tax
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Ability-to-pay Principle
•People with higher incomes not only pay more in total taxes but also pay a higher percentage of their income in taxes
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THE FEDERAL BUDGET
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DISCRETIOARY SPENDING
MANDATORY SPENDING
INTEREST ON DEBT
WHAT ARE THE SPENDING CATEGORIES FOR THE FEDERAL BUDGET?
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Mandatory Spending
Spending that is automatically budgeted without government action & is based on existing laws
Ex. Medicare, medicaid, social security, food stamps.
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Discretionary Spending
The President must make his request and Congress must approve each year.
Ex. International affairs, military, education programs,
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Interest on debt
The cost of the government borrowing money expenditures exceed revenues in a one year period
Deficit – expenditures exceeding revenues
Debt – cumulative value of all previous deficits
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National Debt
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What is national debt?• The total amount of money that the
government owes
Deficit Spending- A government spends more than it collects in revenue
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$17,526,904,035,122.81
The estimated population of the United States is 317,357,309; so each citizen’s
share of this debt is $55,102.18!
The National Debt has continued to increase an average of $2.54 billion per day since
Sept. 30, 2012!
http://www.usdebtclock.org/
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How is money raised for deficit spending?• Treasury Bills – mature in less than 1 year• Treasury Notes – mature in 2-10 years• Treasury Bonds – mature in 30 years• Trust Funds – S.S., medicare, medicaid• Interest paid on all w/ higher interest rates on
those with longer maturity dates
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In 1981 national debt was _______% of GDP (______% privately owned)
In 2006 national debt was _______% of GDP (less than _______% privately owned)
In 2012 national debt was _______% of GDP
3380
6860
70
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Effects of Debt
POSITIVE• When government spends to stimulate the
economy
NEGATIVE• Gov’t competes w/ the private sector for
investments• With more debt, the gov’t is just repaying
interest
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What is fiscal policy?
Fiscal policy is the way governments adjust levels of
_______________ and ________________ in order
to ____________ and ________________ a nation’s
economy.
SPENDING TAX RATESMONITORINFLUENCE
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What is monetary policy?
Monetary policy is the way which a
_______________________ influences a nation’s
money supply.
CENTRAL BANK
Fiscal & monetary policies are used to help guide a country to meet its:
MONEY SUPPLY
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Business Cycle
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Historically…Initially, the US government started with a _________________________
approach to business. However, after the
______________________________________, it was clear that the economy
needed some guidance.
LAISSEZ FAIRE
GREAT DEPRESSION
http://cache.gawkerassets.com/assets/images/8/2011/11/add1ce9116d1320399c40975b92de5c3.jpg ; 11/22/2011.
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So..After WWII, the government decided they needed to take a
_________________________ in the economy to regulate:
•UNEMPLOYMENT•BUSINESS CYCLES•INFLATION•COST OF MONEY
PROACTIVE ROLE
www.members.fortunecity.com ; 11/22/2011.
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LIMITATIONS OF FISCAL POLICY:1. It follows economic conditions and passing legislation takes
time.2. It should follow the business cycle to balance out peaks and
troughs, but it is tough to predict.3. Rational Expectation Theory-people and businesses expect
fiscal policy to have certain outcomes. When they react to protect their interests, they may limit the effectiveness of the policy.
4. Political issues. (Council of Economic Advisers-advises president on fiscal policy, but they do not always follow because of political pressure.)
5. Regional issues.
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Top 10 U.S. Creditors• China $906.8 billion• Japan $877.4 billion• England $477.6 billion• Oil exporters (OPEC) $213.9 billion• Brazil $177.6 billion• Hong Kong $139.2 billion• Caribbean banking centers $133.7 billion• Russia $131.6 billion• Taiwan $131.2 billion• Canada $125.2 billion
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The following are the top ten creditors to the USA as of March, 2009: (Amt. in Billions)
1. China 767.90 2 2. Japan 686.70 3 3. Caribbean Banking Centers 213.60 4 4. Oil Exporters 192.00 5 5. Russia 138.40 6 6. United Kingdom 128.20 7 7. Brazil 126.60 8 8. Luxembourg 106.10 9. Hong Kong 78.90 10. Taiwan 74.80
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DEMAND-SIDE ECONOMICS:FISCAL POLICY TO STIMULATE AGGREGATE
DEMAND– KEYNESIAN ECONOMICS
What was Keynes first
revolutionary idea?
He defined AGGREGATE DEMAND as the sum of investment, consumer spending, government
spending, and net exports.
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What did he propose the
British government do in 1929?
He proposed they spend money on public works projects to create jobs
and ease unemployment.
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What made Keynes question classical
economics?
The 1920’s going into the Great Depression and the
cycle of demand falls, businesses produced less
leading to layoffs, consumers had less money which led to
falling demand…
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Name two of his books:
A Treatise on Money (1930)
The General Theory of Employment, Interest, and
Money (1936)
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Keynes advocated increased government spending and
decreased taxation to end recessions.
INCREASED GOVERNMENT
SPENDING
CREATES JOBS
INCREASES INCOME
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Keynes advocated increased government spending and
decreased taxation to end recessions.
DECREASED TAXATION
CONSUMERS SPEND MORE
BUSINESSES INVEST MORE
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John Maynard Keynes
What is
aggregate
demand?
What are his
monetary policy
views?
He wrote The
Economic
Consequence
s
of Peace
b/c…
What should a
gov’t do in a
recession?
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Aggregate Demand
• The sum of all the demand in the economy
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His Views
•Believed that monetary policy was essential to maintaining a healthy economy• Stabilize the economy by stabilizing
price levels by lowering interest rates
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b/c …
•He resigned as the British Treasury’s Rep @ the Treaty of Versailles b/c he felt the war reparations Germany was being forced to pay were ridiculous
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What to do in a recession?
• Increase gov’t spending to create jobs & give people income to buy goods • Lower taxes so people have more $ to
buy goods•Both would increase AD
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WHO? WHY?HOW?WHAT?
Based on the Laffer Curve, developed by Arthur Laffer
States that a reduction in
taxes will stimulate the
economy through
increased consumer spending.
• Less taxes = more $ for consumers
• Consumers spend $ which increases demand for businesses
• More business = more jobs
• Workers can bargain for higher wages
• That leads to higher tax revenues
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SUPPLY-SIDE FISCAL POLICY:Focuses on cutting the cost of production to encourage producers to supply more.
SUPPLY-SIDE ECONOMISTS FAVOR:•CUTTING TAXES ON INDIVIDUAL AND CORPORATE INCOME•CUTTING IN THE HIGHER TAX BRACKETS GIVES MORE MONEY
TO THOSE MOST LIKELY TO INVEST IN BUSINESS •SPENDING CUTS-THE LESS THE GOVERNMENT SPENDS
THE LESS TAXES NEED TO BE COLLECTED•DECREASE GOVERNMENT REGULATION BECAUSE THESE ADD
TO THE COSTS OF PRODUCTION
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Explaining Laffer’s Theory
Illustrates how tax cuts affect tax revenues and economic growth.Tax revenues increase as tax rates increase to a certain point.
After that point, higher taxes actually lead to decrease tax revenue.WHY?
Too high of taxes could actually discourage people from working, investing, and spending.
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PROVING LAFFER’S THEORY:Legislation passed in the 1980’s
CUT federal income tax rates substantially (top tax bracket from 70% to around
30%), however revenue collected from income tax
INCREASEDabout 13%.
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DISPROVING LAFFER’S THEORY:1. With lower taxes people should
work more as some did. However, some found they brought home the
same amount of income from before the tax cuts by working less.
2. Lower tax rates should increase savings and investments, but
savings declined during the 1980’s. http://www.youtube.com/watch?v=pSOgxZ8lRUw
http://www.youtube.com/watch?v=ZH1Cms4zk7c