Current Events:
Gertler Discusses Federal Open Market Committee Meeting
Bloomberg — March 15, 2010 — March 15 (Bloomberg) -- Mark Gertler, a professor of economics at New York University, talks with Bloomberg's Carol Massar about the outlook for Federal Reserve monetary policy and the U.S. economy. (Source: Bloomberg)
The Ch. 18 Short Answer Test is on Thursday; be sure to consult the Ch. 18 Test Prep Page and, as a review for Short Answer type answers, consider the newly posted Ch. 16 Short Answer Quiz KEY page.
We will pick up where we left off in Chapter 21.
Chapter 21 The Monetary System
Chapter Overview
This chapter covers the definition and functions of money (and the measurements M1 and M2), then turns to a discussion of the demand for and supply of money examining the market for money and the market for bonds. How banks create money is next, followed by material on the Federal Reserve System and an introduction to the tools of monetary policy (monetary policy is the subject of the next chapter). It should be noted that the chapter discusses monetary policy in terms of the Fed changing the supply of money to cause changes in interest rates.
Chapter Outline
The Federal Reserve System
Federal Reserve, 7:07
PBS NewsHour economics correspondent Paul Solman explains the workings of the Federal Reserve, c. 5:00, up to the sail analogy.
The Structure of the Federal Reserve
The Board of Governors
Federal Reserve Banks
Federal Open Market Committee (FOMC)
The Tools of the Federal Reserve
Reserve Requirements
Discount Rate
Open Market Operations
Checkpoint: The Federal Reserve System
Ideas for Capturing Your Classroom Audience
As we have time, we can move on to the next chapter.
Chapter Checkpoints
Extended Example in the Chapter
Where Did All the One-Dollar Coins Go?
The U.S. government continually tries issuing dollar coins, but they don’t seem to
catch on. Dollar coins don’t seem to circulate in the United States. The 1979 Susan B. Anthony dollar was not popular (many people said it was too close in size to a quarter) and neither was the Sacagawea dollar coin introduced in 1999. So why would the government try again now in 2007 with the Presidents series of dollar coins?
It may be that the purpose has changed. While the argument was saving on the cost
of producing money in earlier decades (a dollar coin lasts longer than a dollar bill) the attraction now may be for the coins NOT to circulate! See the article by Gordon T. Anderson titled “Congress Tries Again for a Dollar Coin: After Two Bellyflops, Congress Is Considering a Dollar Coin Again. This Time It Might Actually Work” (CNN Money, April 28, 2005: 5:35 PM EDT), available on the Web at http://money. cnn.com/2005/04/27/pf/new_dollar/). The author points out the seigniorage profits the government can earn if people hoard the coins instead of using them.
Examples Used in the End-of-Chapter Questions
Question 2 asks about barter and modern economies. It’s worth noting that an
increase in barter characterized the late 1990s in Russia, a situation unusual among nations in transition. There are numerous studies of barter in Russia, but an interesting perspective can be found in this piece by the president of the Ukraine talking about the “murky” bartering of resources with Russia. The article is “A Deal to End All Barter” by Victor Yushchenko (09:44 25 JANUARY 2006, The Wall Street Journal Europe). See the Web at http://www.president.gov.ua/en/news/data/26_5700.html.
Question 7 references the FDIC. To learn more about the agency visit its Web site at http://www.fdic.gov/.
Questions 11 and 15 concern the independence of the Federal Reserve System. For
more information see the Web site at http://www.federalreserve.gov/generalinfo/
faq/faqfrs.htm.
Question 12 asks about the membership of the FOMC. For more information see the
Web site at http://www.federalreserve.gov/generalinfo/faq/faqfomc.htm.
For Further Analysis
Required Reserves and the Money Multiplier
This example can be used as a small group exercise or as an individual exercise.
The exercise provides an opportunity for students to apply the material in the chapter on reserve requirements and the money multiplier to work through some of the calculations. Setting the required reserve ratio equal to zero allows students to see that the amount of money in circulation would grow by an infinite amount. You may also consider having students construct the same example as an Excel spreadsheet.
Web-Based Exercise
Learn more about the people who make up the Federal Reserve Board of
Governors. You can find links to their biographies from the site at http://www.
federalreserve.gov/bios/.
Note to instructors: In the summer of 2007 there were two vacancies on the Board.
In a May 15, 2007, story from Market Watch (Dow Jones), Greg Robb reported
that President George W. Bush had nominated Elizabeth Duke, the chief operating
officer of TowneBank of Portsmouth, Virginia, and Larry Klane, a senior official
at Capital One Financial Corp., to fill the positions. See the article at
http://www.marketwatch.com/news/story/bush-picks-two-bankers-fed/story.
aspx?guid=%7BAE3A0592-80B2-477C-8C4B-89719F6E51F1%7. Depending on the
time at which you cover this material, it might be of interest to learn more about
the confirmation hearings for new appointees.
After reading the biographies, answer the following:
1) Discuss the backgrounds of the people who make up the Board. Are they all
economists?
2) How long has each person served?
3) Has the fact that President Bush has appointed all of the current members
affected the Fed’s independence?
Tips from a Colleague
The topic of “how banks create money” always stumps students because they don’t
completely understand that the loan checks issued by banks result in transfers of
deposit funds. Emphasize what is and what is not money; for example, it is not the
check that is money but the funds on deposit. Even more important, debit cards are
money but credit cards are not.
Chapter 20 Material
Chapter Checkpoints
Implementing Fiscal Policy
Question: Unless the economy enters a deep recession, we rarely hear Congress
discuss the budget in terms of fiscal policy: passing a spending and taxing package for macroeconomic purposes. Most of the discussion is on particular spending priorities for specific programs and bringing home projects for an individual politician's district. Has Congress essentially abandoned fiscal policy and left macroeconomic stabilization to the Federal Reserve and the setting of monetary policy?
The point is to check that students can: understand how changes in the price of oil affect the economy. It might be useful to point out that the initial effect is a decrease in aggregate supply against an unchanging aggregate demand.
Extended Example in the Chapter
The Size of Government Debate
Fiscal policy debates may have as much (if not more) to do with the philosophical
debate about the proper size of government as about the state of the macroeconomy.
In general, those on the left of the political spectrum favor a larger and more
active government while those on the right are constantly looking for ways to limit the size and power of the government. Examining federal receipts and expenditures as a percentage of GDP reveals the federal government’s tendency to spend more and more. The reason for this seems obvious: to cut spending Congress must cut programs, and whose programs would be cut? (In a later chapter, Chapter 23, the question of the budget deficit will be considered in more detail.)
Examples Used in the End-of-Chapter Questions
Question 2 references an article by Robert Dunn, titled “Let the Surplus Go” (The
New York Times, August 19, 2001) regarding the declining budget surplus. A summary
of the article in outline form (with key words noted) appears on the Web site
of Truth and Politics at http://www.truthandpolitics.org/html_gen.php?entryId=55.
Question 4 references The Power of Productivity by William Lewis (Chicago:
University of Chicago Press, 2004). An interview with William Lewis (by Nick
Schultz) is available on the Web site of TCS Daily: Technology, Commerce, Society,
at http://www.techcentralstation.com/061705A.html. Among the points elaborated
in the interview are Lewis’s views about the combination of big government and
underdeveloped economies.
The pieces are “Remember Fiscal Policy?” in the “Economics Focus” section and
“The Case for Using Fiscal Policy” in the “Economic Policy Section.” The first piece presents the arguments that fiscal policy may have less of an effect on the economy than its proponents contend and moreover, that for political reasons, policymakers are “incapable of designing the right measures or enacting them at the right time.” The second piece contends that Keynesian measures to counteract a recession (particularly deficit spending) went “out of fashion years ago.” It goes on to suggest that such methods had been misapplied, meaning that they were being used to promote growth as opposed to counteracting recession.
For Further Analysis
Using the AS/AD Model to Explore the Impacts of Demand-Side Fiscal Policy
This example can be used as an in-class small group exercise or as an individual in class exercise. It is designed to complement the text’s material by employing the graphical analysis of the AS/AD model to illustrate the effects of demand-side fiscal policy when the economy is below full employment and when it is above full employment. It would not be difficult to adapt the handout to have students consider contractionary policy as well.
Note that for the second question students will have to show a shift in aggregate
demand and then a resulting shift in aggregate supply in order for the economy to
return to long-run equilibrium. You may also wish to summarize the assignment,
pointing out how important it is for the government to assess how close GDP is to
full employment and that regardless of the current level of output (compared to Qf), expansionary fiscal policy seems to always result in higher prices.
Web-Based Exercise
Listen to the Candidates Debate
This example can be used as a small group exercise or as an individual exercise.
The exercise provides an opportunity for students to apply the material in the chapter to positions of political candidates. This also allows students to appreciate the political spectrum, particularly in terms of the “middle” where positions are not so clearly “left” or “right.” You can make the assignment more or less extensive by choosing a number of candidates for students to consider, including local or state candidates as well as presidential and congressional candidates. Alternatively, you can also have students learn more about the positions of their already-elected state (or local) representatives; for example, what are their voting records?
Listen to the Candidates Debate
Visit the Web sites of political candidates and learn more about their positions with regard to the economy, particularly in terms of taxes and spending. Remember that government spending is associated with funding particular programs.
Tips from a Colleague
Students may not appreciate that the size of government is an ongoing matter of
debate in the United States and other countries. You may wish to review the material from Chapter 1 regarding the role of government in the economy and discuss the normative aspects of economics. Students may not fully appreciate the role of Congress and the interaction between Congress and the Executive Branch in terms of fiscal policy, so the process may be worth a brief review, particularly in the discussion of lags.
References
Be sure to consult the Ch. 18 Test Prep Page for the upcoming Ch. 18 Short Answer Test on Thursday.
1. Be sure to review Chapters 19-21 (we will have Quizzes and Tests on this material as well, TBA). Some students have asked to be tested as close as possible after covering the material. To this end, we can have a Short Answer Ch. 18 Test before students forget the material; since, we have already started Ch. 21.
2. Implementing Fiscal Policy
Question: Unless the economy enters a deep recession, we rarely hear Congress
discuss the budget in terms of fiscal policy: passing a spending and taxing package for macroeconomic purposes. Most of the discussion is on particular spending priorities for specific programs and bringing home projects for an individual politician's district. Has Congress essentially abandoned fiscal policy and left macroeconomic stabilization to the Federal Reserve and the setting of monetary policy?
The point is to check that students can: understand how changes in the price of oil affect the economy. It might be useful to point out that the initial effect is a decrease in aggregate supply against an unchanging aggregate demand.
3. As review for HW, typical questions that you may encounter on the actual AP Economics Macro Test are included daily:
Financial Sector, Review Questions
a) 0.1
b) 1
c) 9
d) 10
e) 5
5. Which of the following actions by the Federal Reserve will result in a decrease in the money supply?
a) an increase in the required reserve ration
b) a decrease in federal spending
c) buying government securities in the open market
d) a decrease in the discount rate
e) an increase in taxes
6. When the interest rate rises, bond values
a) decrease
B) increase
C) are unchanged because the interest rate paid on a bond is fixed
D) can either increase or decrease depending on the type of bond
E) are adjusted by the U.S. Treasury
