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Chapter 2 Federal Fical and Monetary Policy

Chapter 2 Federal Fical and Monetary Policy - Financing...

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Financing Residential Real Estate Lesson 2: Federal Fiscal and Monetary Policy
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Introduction In this lesson, we will cover: the federal government’s fiscal policy taxation the federal government’s monetary policy the Federal Reserve system tools for implementing monetary policy
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Introduction The federal government affects real estate finance by influencing the cost of mortgage funds. The major cost of borrowing money is the interest rate charged by the lender.
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Introduction The federal government affects real estate finance by influencing the cost of mortgage funds. The major cost of borrowing money is the interest rate charged by the lender. Market interest rates = current cost of $
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Introduction The cost of borrowing money is influenced by the federal government in two ways: 1. fiscal policy , and 2. monetary policy .
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Introduction Fiscal policy Government’s actions in raising revenue, spending money, and managing its debt. Monetary policy Government’s direct efforts to control the money supply and the cost of money.
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Fiscal Policy Set by the government’s executive and legislative branches (the president and Congress), who establish federal tax laws and federal budget.
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Fiscal Policy Set by the government’s executive and legislative branches (the president and Congress), who establish federal tax laws and federal budget. U.S. Treasury Department manages the government’s finances, carrying out fiscal policy.
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Fiscal Policy Federal deficit The shortfall that results when the government spends more money than it takes in. Spending and debt financing
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Fiscal Policy Federal deficit The shortfall that results when the government spends more money than it takes in. Treasury obtains funds to cover shortfall by issuing interest-bearing securities. Spending and debt financing
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Fiscal Policy Federal deficit The shortfall that results when the government spends more money than it takes in. Treasury obtains funds to cover shortfall by issuing interest-bearing securities. I By selling securities to investors, government is borrowing money from the private sector. I Leaves less money available for private borrowers. Spending and debt financing
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Fiscal Policy Some economists believe federal deficit has little effect on interest rates. Others believe federal borrowing pushes interest rates up. Spending and debt financing
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Fiscal Policy Tax policies affect how much money taxpayers have left for other purposes: Low taxes = more $ to lend and invest High taxes = less $ to lend or invest Taxation
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Fiscal Policy Tax policies affect how much money taxpayers have left for other purposes: Low taxes = more $ to lend and invest High taxes = less $ to lend or invest Tax policies also affect investment choices: High taxes = tax-exempt securities preferred Low taxes = taxable investments attractive Real estate, MBS are taxable.
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