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Consists of 7 members 14 year terms appointed by

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Consists of 7 members, 14-year terms, appointed by president confirmed by Congress. They are supposed to be insulated from political pressures. The Fed sets discount rates for the money that banks borrow from the Federal Reserve banks. If they raise the rate, banks will have to pass costs to the customers and fewer people will want to take out loans resulting in less money in circulation, and vice versa. The Fed also sets reserve requirements that determine the amount of money that banks must keep in reserve at all times. An increase means less money to lend out. In sum, raising the costs of borrowing money (higher interests) increases the risk of unemployment and recession, making more money available to borrow (lower interests) increases the risk of inflation. The Fed tries to create the perfect balance. So the amount of money available, interest rates, inflation, and the availability of jobs are all affected by the financial dealings of the Fed. F. Fiscal Policy Fiscal policy describes the impact of the federal budget (taxing, spending, and borrowing) on the economy. Fiscal policy is shaped mostly by the Congress and president. There are two major theories regarding the use of fiscal policy. 1. Keynesian Economic Theory 12
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ISS 225 – Power, Authority, Exchange Economic Order John Maynard Keynes argued in the 1930s that government could spend its way out of the Depression by stimulating the economy through an infusion of money from government programs (government spending). If businesses were unable to expand, government should pick up the slack. If there were no jobs available, government should create them. The key was to get money back into the consumer’s pocket. Thus, the government's job would be to increase the demand when necessary and the supply would take care of itself. Government spending, of course, also meant higher taxes to pay for it. Beginning with the Roosevelt administration, Keynesian theory dominated both Democratic and Republican administrations for years. This included such programs as the New Deal, Great Society, increases in social security, welfare, federal grants, etc. 2. Supply-side Economics Ronald Reagan proposed a radically different theory based on the premise that government should stimulate the supply of goods not their demand. This is known as supply-side economics . By taxing too heavily, spending too freely, and regulating too tightly; government curtailed economic growth. They believed the government must create incentives. Incentives to invest, work harder, and save could be increased by cutting back on the scope of government (esp. taxes). Economist Arthur Laffer argued that the more govt. taxed, the less people worked, the smaller the government's tax revenues. (Incentive to work is reduced by higher taxes.) Cut taxes, people work harder, produce a greater supply of goods and therefore pay a greater total amount of taxes. In the extreme, by taking a smaller percentage of people's income the government would actually get more total revenue as production increased. More people paying taxes and making higher wages – result – more taxes.
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