American Perspectives II Unit 2 Test Notes

Define fiscal policy and explain its significance in managing economic stability.
1. Use of government spending and taxation to influence the economy
2. Involves decisions made by a government regarding how it collects and spends money to achieve specific economic goals
3. Spending more or cutting taxes to stimulate an ailing economy or slashing spending or raising taxes to rein in inflation or reduce external vulnerabilities
4. Tools
  1. Government spending
  2. Taxation
  3. Budget deficits or surpluses
  4. Government debt
  5. Economic stimulus
  6. Fiscal restraint
  7. Income redistribution
  8. Long-tern economic planning

Describe one tool of expansionary fiscal policy and explain how it works to stimulate the economy.
1. Increasing government spending
  1. Puts more money into the economy to stimulate economic growth
2. Decrease taxes
  1. More money can go towards investing with less needed for buying
3. Increasing government spending and decreasing taxes
  1. Boosts aggregate demand
  2. Encourages higher level of economic activity and investment

If the government aims to decrease aggregate demand, discuss the potential impacts of increasing taxes as a fiscal policy action.
1. There will be more revenue for the government and financing public goods and services
2. Less people want to spend or invest
3. People will be unhappy because they do not want increased taxes

Explain the primary goal of contractionary fiscal policy and provide an example of a situation where it might be necessary.
1. Slow downs or reduces the rate of economic growth and curb inflationary pressures within an economy
2. Decreasing government spending, increasing taxes, or a combination of both to decrease aggregate demand, and consequently, dampen economic activity
3. Use when the economy is booming so it reduces the government’s budget deficit and the national debt, saving money for future times when expansionary policy may be necessary

Discuss how an increase in government spending affects the economy, considering its impact on aggregate demand and potential consequences.
1. Increase in government spending increases aggregate demand
2. Increase in government spending reduces savings in the economy, increasing interest rates
3. Rise in interest rates
  1. Higher interest rates lower private investment, thereby lowering output growth
4. Not effective at stimulating an economy in normal times
  1. Can be effective way to escape a recession
5. Aggregate demand
  1. Total demand for goods and services within a particular market
6. Increases GDP
7. Drives down private sector spending
8. Reduces private sector income and loan demand
  1. Decreases spending and borrowing

Identify the entity responsible for conducting monetary policy in the United States and elaborate on its role in shaping the economy.
1. Federal Reserve
2. Importance
  1. Economic stability
  2. Financial regulation
  3. Inflation and employment
  4. Government and central banking
  5. Global impact
  6. Political and economic debates
  7. Investment and financial planning
  8. Historical context
    1. Monetary policy is intertwined with broader historical events, such as wars, technological advancements, and social movements.
    2. An understanding of monetary policy provides a lens through which to analyze and contextualize these historical developments.

Explain the main tool used by the Federal Reserve to control the money supply, detailing its mechanisms and effects.
1. Interest on reserves
  1. Primary tool
  2. Influences federal funds rate, other market interest rates in turn, and consumer and business borrowing and spending
  3. Decreases reserve ratio, lowers amount of cash that banks are required to hold in reserves
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    1. More loans to customers and businesses
    2. Increases nation’s money supply and expands the economy

If the Federal Reserve aims to stimulate economic growth, discuss the potential outcomes of buying government securities as a monetary policy action.
1. Federal reserve reduces the supply of these bonds in the broader market
2. Private investors who desire to hold these securities will then bid up the prices of the remaining supply, lowering their yield
  1. Portfolio balance
3. If the federal reserve buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public
4. If fed sells bond, it decreases the money supply by removing cash from the economy in exchange for bonds

Describe one monetary policy tool that involves changing the amount of money banks are required to hold in reserves. Explain its purpose and potential effects.
1. Open market sales
  1. Sells govnerment securities to banks, which reduces their reserves and, in turn, reduces the amount of money banks can lend to the public
  2. Can influence short-term interest rates, such as federal funds rate in the US
  3. Reduces money supply and cools down the economy to combat inflation

Discuss one potential drawback of expansionary monetary policy and analyze its implications for the overall economy.
1. Increases money supply
  1. Highers the bank reserves
2. Decrease the interest rate
3. Investment, consumption, and net exports with increase
  1. Causing aggregate demand to shift to the right
    1. Additional borrowing for investment and consumption
4. Increased inflation
  1. Government relax the control of money in circulation by pumping more money inot an economy
  2. The fed’s use of open market operations affect banks’ money available to lend
  3. The rate is the interest rate banks charge each other for borrowing or storing money

In a period of high inflation, explain the likely monetary policy approach the Federal Reserve might pursue and justify the reasoning behind this choice.
1. Contractionary monetary policy
  1. Tempers inflation and reduces the level of money circulating in the economy
2. An increase in federal funds rate
  1. Causes other market interest rates to rise
  2. Reduces consumer and business spending, slowing economic activity and reducing inflationary pressure

Define the dual mandate of the Federal Reserve and discuss the challenges associated with balancing both objectives.
1. Price stability and maximum sustainable employment
  1. Maintain a healthy economy that supplies jobs enough for job seekers and keeps prices from fluctuating and unemployment targets
  2. Mentioned in the Employment Act of 1946
2. May not always result in desired economic outcomes
3. Fed’s policies may contriute to financial instability, such as asset bubbles, by keeping interest rates artificially low for extended periods
4. Although price stability can help achieve maximum sustainable output growth and employment over the longer run, in the short run some tension can exist between the two goals.
  1. For example, if the Fed were to attempt to drive unemployment to continually lower levels, inflation would likely get out of hand.
  2. On the other hand, if the Fed were to become overly concerned about inflation and refuse to allow the money supply to expand quickly enough, then unemployment would likely rise to painful levels

Explain the role of the Federal Reserve in regulating banks, detailing one specific mechanism it uses to achieve this regulatory function.
1. supervising , monitoring, inspecting, and examining certain financial institutions to ensure they comply with rules and regulations and operate in a safe and sound manner
2. Regulation and supervision
3. Assess banks financial health
  1. Capital adequacy
  2. Risk management
  3. Consumer protection
4. Maintain stability
  1. Minimize systemic risks
  2. Protects depositors
5. Uses the Board of Governors to set standards of operation for banks through regulations, rules, policy guidelines, and interpretations of relevant laws
6. OCC
  1. Charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks
  2. Independent bureau of the US department of the treasury
7. Crucial Role of a Central Bank
  1. Monetary Policy
  2. Bank Supervision and Regulation
  3. Lender of Last Resort
  4. Payment System Oversight
  5. Currency Issuance

Based on historical examples, discuss the impact of the establishment of the Federal Reserve in 1913 during the early 20th century.
1. Created the central bank that would become the cornerstone of american monetary policy
2. Federal reserve act
  1. Woodrow wilson- december 23, 1913
  2. Created federal reserve system
    1. Consisted of 12 regional banks and a central governing board
  3. Provided more flexible and stable monetary system
    1. Bc of panic of 1893 and 1907
  4. Regulates banks
  5. Respons to financial crisis
3. Needed more stable and elastic currency
  1. Last resort lender
4. National monetary commission
5. Reforms
  1. Greater government intervention
  2. Regulation to address economic instability and inequality

Examine the criticisms surrounding the Federal Reserve's policies during the Great Depression and their alleged contribution to the severity of the economic downturn.
1. During this period, the Federal Reserve faced criticism for its monetary policy decisions, which were seen as contributing to the severity of the Depression
  1. The Fed's tight monetary policies, including raising interest rates and restricting the money supply, exacerbated the economic downturn
  2. It wasn't until later in the 1930s that the Fed began implementing more expansionary policies, which, along with other government interventions, contributed to the eventual recovery from the Depression
Discuss the significance of the Bretton Woods Agreement established in 1944 and its role in shaping the international monetary system.
1. Collective international currency exchange regime that lasted from the mid-1940s to the early 1970s
2. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values
3. Required a currency peg to the U.S. dollar which was in turn pegged to the price of gold
4. International monetary system that would ensure exchange rate stability, prevent competitive devaluations, and promote economic growth
5. established a system of payments based on the dollar, which defined all currencies in relation to the dollar, itself convertible into gold, and above all, "as good as gold" for trade

Explain the key focus of the Federal Reserve during the post-World War II economic boom and its implications for economic stability.
1. Support war efforts
  1. Helped finance wartime spending
  2. Fund our allies
  3. Embargo our enemies
  4. Stabilize the economy
  5. Plan the return to peacetime activities
2. WWII was the most expensive war in US history
  1. Cost over $4 trillion
  2. In 1945, defense spending comprised about 40% of gross domestic product (GDP)

Analyze the economic challenge faced by the United States during the 1970s, characterized by high inflation and stagnant economic growth.
1. Economic problems faced by the United States in the 1970s
  1. an increased presence of women and teenagers in the workforce (as they were less likely to take full-time/long-term jobs where skills would be developed)
  2. declining investment in new machinery, the heavy costs of compliance with government regulation, and the shift of the American economy from manufacturing to services (where productivity gains were allegedly more difficult to achieve and measure)
  3. Lastly, the U.S. faced inflation (nearly 20%) in the 1970s caused by rising oil prices and federal inflation, (which had its roots in Lyndon B. Johnson's policies for fighting the Vietnam War and funding the Great Society programs)
  4. it also faced a major challenge in manufacturing from a rebuilding Germany and Japan who were able to upgrade their factories and technology.
2. Stagflation in the 1970s combined with uneven economic growth
  1. High budget deficits
  2. Lower interest rates
  3. Oil embargo
  4. Collapse of managed currency rates
3. Inflation (20%)
  1. Fed policy
  2. Abandonment of the gold window
  3. Keynesian economic policy
  4. Market psychology

Evaluate the role of Paul Volcker as the Federal Reserve Chair in the early 1980s and the impact of his tight monetary policies on controlling inflation.
1. Ended the high levels of inflation
  1. Volcker shock
    1. High-interest rates by Volcker’s decision to raise the central bank’s key interest rate, the Fed funds effective rate, during the first three years of his term
  2. Conveyed that increased interest rates were from market pressures and not Board actions
  3. Raised the discount rate by 0.5% shortly after taking office
  4. Raised interest rates to 20%

Discuss the priorities of the Federal Reserve during the Greenspan era in the 1980s, particularly its emphasis on sustainable economic growth.
1. Attempted to help support the US economy by activity using the federal funds rate to aggressively lower interest rates to fight the deflation of asset price bubbles
2. Developed a policy of bailing out stock investors by injecting liquidity into the economy amid large stock market declines
  1. Greenspan put
    1. Monetary policy strategy popular during the 1990s and 200s under Greenspan
3. Raised rates seven times in 13 months in 1994 and early 1995 in an effort to prevent an overheating economy from driving up inflation

Examine the outcome of the Fed's policies in the late 1970s and 1980s regarding inflation, focusing on the changes in inflation rates.
1. Great inflation
  1. Blamed on oil prices, currency speculators, greedy businessmen, and avaricious union leaders
  2. Monetary policies that financed massive budget deficits and were supported by political leaders were the causes
2. Volcker highered interest rates to 20% to slow the economy and bring inflation down
3. The fed’s contractionary monetary policy that sought to rein in the high inflation
  1. By raising these rates, the Fed encourages banks and other lenders to raise rates on riskier loans and siphon more of their money to the no-risk fed, thereby reducing the money supply, which has the effect of reducing inflation
  2. Lowered inflation rates

Explore the factors contributing to speculative excesses in the technology sector during the late 1990s and early 2000s, considering monetary policy.
1. Dotcom bubble
  1. Rapid rise in US technology stock equity valuations fueled by investments in Internat-based companies in the late 1990s
  2. Value of equite markets grew exponentially during the dotcom bubble
2. Causes
  1. Money pouring into tech and internet company start-ups by venture capitalists and other investors was one of the major causes
  2. Cheap funds obtainable through very low interest rates made capital easily accessible
3. As interest rates rise, future technological innovations oculd diminish
4. These innovations consequentially reduce future inflation by making the economy more productive
5. Less innovation could translate into higher inflation, increasing interest rates adn reducing the appetite to fund innovation in a deleterious cycle

Analyze the characteristics of the housing bubble in the mid-2000s, specifically addressing the factors that contributed to its formation.
1. Global economic meltdown triggered by the bursting of the housing bubble and the subsequent collapse of financial institutions
2. High demand, low supply, and prices that are inflated prices beyond fundamentals
3. Began with cheap credit and lax lending standards
  1. When the bubble burst, the banks were left holding trillions fo dollars of worthless investments in subprime mortgages
4. Stemmed from an earlier expansion of mortgage credit, includign to borrowers who previously would have had difficulty getting mortgages, which both contributed to and was facilitated by rapidly rising home prices

Discuss one unconventional monetary policy tool implemented by the Federal Reserve to support economic recovery after the 2008 financial crisis.
1. Played a central role in responding to the crisis
  1. Lowered interest rates to near-zero
  2. Implemented quantitative easing
    1. Burning financial assets like bonds to inject liquidity into the economy
  3. Provided emergency funding to struggling banks and financial institutions
  4. Measures were aimed at stabilizing the financial system and preventing a complete economic collapse
    1. Fed’s actions helped avert a more prolonged and severe recession

Examine the market volatility in 2013 when the Fed announced potential tapering of quantitative easing, known as the "Taper Tantrum."
1. Tapering refers to a gradual reduction in the monthly purchase of assets by the Federal Reserve.
2. Keep in mind that tapering means the Fed will still be purchasing assets, just not as many.
3. So Federal Tapering is the process of slowing down the rate at which Quantitative Easing is done.
4. Taper Tantrum
  1. The movement in bond yields caused by investor reactions to a central bank announcing future tapering of bond-buying programs
  2. If the central bank does not stop purchasing bonds immediately, investors may sell off their bonds, which forces yields to rise
  3. The sales are said to be “tantrum” in reaction to the news of tampering
  4. Tapering refers to the fed scaling back bond and asset purchases
  5. In May 2013, the fed chairman, Ben Bernanke, announced the central bank would begin tapering asset purchases at a future date
  6. Financial markets were disturbed globally
  7. As bond yields rose in the US, those bonds became a more attractive investment than emerging-market assets
  8. Capital flowed out of emerging markets

Evaluate the aggressive monetary policies implemented by the Federal Reserve in response to the COVID-19 pandemic, including rate cuts and asset purchases.
1. The COVID-19 pandemic led to an unprecedented economic shock, with lockdowns and business closures causing widespread job losses and economic uncertainty
2. The Federal Reserve responded swiftly by again lowering interest rates to near-zero and implementing massive asset purchases to support financial markets
  1. Additionally, the Fed introduced lending programs to provide liquidity to businesses and municipalities facing financial stress so they could meet credit drawdowns and make new loans to businesses and housefolds feeling financial strains
3. The Fed's actions were part of a broader effort to prevent a financial crisis from exacerbating the pandemic-induced economic downturn
  1. These measures, combined with fiscal stimulus, played a vital role in stabilizing the U.S. economy during the pandemic
4. Child Tax Credit, unemployment insurance, food assitance, health, and housing programs

Discuss the new focus signaled by the Federal Reserve during the COVID-19 pandemic in terms of policy objectives, particularly regarding employment.
1. Temporarily relaxing regulatory requirements
2. Forward guidance
  1. Future plans for short-term interest rates
    1. Monetary policy used to maintain target range until on track to achieve its maximum employment goals
  2. expects it will be appropriate to maintain [the zero lower bound] until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals

American Perspectives II Unit 2 Test Notes | Knowt (2024)