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ex: 9/11 press release: “The federal reserve system is open and operating. The discount window is available to meet liquidity needs.”Central Banks are typically fairly independent of their governmentsCongress gives them their dual mandate: stable prices and low unemploymentPart E: Fiscal Policy35
Q:Which is larger? The federal federal deficit or the federal debt?A:Fiscal deficit describes a government with expenditures that are greater than its revenues during a fiscal year. The federal debtisthe total amount of money that the U.S. federal government owes to its creditors.Deficit = $506 billion (2.9% of GDP)= (G + Trans. Payments) - T= $3,512 billion - $3,006 billionTotal federal Debt$17.2 trillionDebt owed to the public$12.8 trillion (74% of GDP)Deficit-amount borrowed per yearDebt: total owed (accumulated deficits)1.The federal government should balance its budget every year (i.e. spending taxes; no borrowing)2.When a recession occurs fiscal policy should be used to fight the recessionStatements 1 and 2 are in conflictMost economists argue for balancing the budget over the business cycle. This is “counter-cyclical fiscal policy”Two ways to do this:Automatic stabilizers- ex. unemployment insurancedoesn’t take a new law or an act of congress.. already in the system36
acts pretty quicklyDiscretionary fiscal policy takes an act of congress and the presidents signatureex. recovery act of 2009 - nearly $1 trillion of tax decreased and spending up 6% of GDPtakes more timeSince the great recession, fiscal policy has slowed growthResult of the move toward a balanced budgetF. Limits to fiscal and monetary policyFiscal policy: When the economy is at full employment, fiscal policy “crowds out” private spendingex. more money spent of schools.. fewer malls being builtG increases, C, I decreases, so Y is unchangedIncreased public spending leads to decrease in private investmentMonetary policy: low interest rates might not encourage much borrowing in a recessionex. buy a new car when unemployed?37