S central bank Federal Reserve Fed established by Congress and most key

S central bank federal reserve fed established by

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U.S. central bank = Federal Reserve (“Fed”) - established by Congress and most key positions appointed by the president and confirmed by Senate Yet the Fed is largely independent of the federal government by law Fed’s “dual mandate” from Congress: “promote effectively the goals of maximum employment , stable prices *, and mbn hoderate long-term interest rates” *stable prices - Fed takes as 2% inflation Fed Chair: Janet Yellen, also heads the “Federal Open Market Committee” (FOMC) Key Fed tool - federal funds interest rate What banks charge each other for overnight loans: $100M
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FOMC sets this rate - now at 1.25% It in turn influences other interest rates o How the Fed affects U.S. The FOMC increases federal funds interest rate → higher costs for banks → loan rates for consumers and firms increase → more expensive for firms and consumers to buy goods with credit → slower growth (%Δ real GDP) → fewer jobs created, harder time finding a job, and fewer new firms → less inflation as smaller increases in demand for goods and services Why would the Fed do this? Achieve 2% inflation (part of their dual mandate) Fiscal policy: o Changes in federal expenditures and taxes These 2 are changed independently o Controlled by the president and congress o Government budget deficit = federal expenditures - federal taxes Ex: 2017 $693 bil. = $4,008 bil - $3,315 bil 3.7% = 21.0% - 17.3% (of GDP) Funds for the deficit come from the U.S. Treasury borrowing from investors by selling them bonds Federal debt: total amount of bonds sold or the accumulated deficits Federal debt: $14.6 trillion (77% of GDP) Interest payments on the federal debt: $269 billion (14% of GDP) Deficit = federal expenditures - federal taxes o Decreasing federal expenditures and/or increasing federal taxes will decrease deficit Federal government (president and congress) set federal expenditures and taxes (fiscal policy) - borrowing (deficit) pays for any expenditures not covered by taxes o Federal debt = accumulated deficits federal expenditures: $4,008 billion (21.0% of GDP) federal taxes: $3,315 billion (17.3% of GDP) deficit: $693 billion (3.7% of GDP) Federal debt: $14.6 trillion (77% of GDP) 3. Be able to calculate the GDP deflator and CPI and explain what they measure. (Ch. 8.3 & 9.4 and notes)
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GDP deflator : a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100 o GDP deflator = Nominal GDP x 100 Real GDP Consumer price index (CPI) : a measure of the average change over time in the prices a typical urban family of four pays for the goods and services they purchase o Also called “cost-of-living” index o CPI is intended to measure changes in the price level over time CPI = Expenditures in the current year X 100 Expenditures in the base year 4. Be able to explain the limitations of GDP and the CPI. (Ch. 8.2 & 9.4) Limitations of GDP Household production and personal use o Ex: a person cleaning their own house - value of this service is not counted in GDP - hiring a maid to clean would be Underground economy o Ex: drugs, prostitution Well-being o
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