Ex 911 press release the federal reserve system is

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 governments
Congress gives them their dual mandate: stable prices and low
unemployment
Part E: Fiscal Policy
35

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 debt is
the 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 billion
Total federal Debt
$17.2 trillion
Debt owed to the public
$12.8 trillion (74% of GDP)
Deficit- amount borrowed per year
Debt : 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
recession
Statements 1 and 2 are in conflict
Most 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 insurance
doesn’t take a new law or an act of congress.. already in
the system
36

acts pretty quickly
Discretionary fiscal policy
takes an act of congress and the presidents signature
ex. recovery act of 2009 - nearly $1 trillion of
tax decreased and spending up 6% of GDP
takes more time
Since the great recession, fiscal policy has slowed growth
Result of the move toward a balanced budget
F. Limits to fiscal and monetary policy
Fiscal policy: When the economy is at full employment, fiscal
policy “crowds out” private spending
ex. more money spent of schools.. fewer malls being built
G increases, C, I decreases, so Y is unchanged
Increased public spending leads to decrease in private investment
Monetary policy: low interest rates might not encourage much
borrowing in a recession
ex. buy a new car when unemployed?
37