Crash Course Government and Politics: Monetary and Fiscal Policy

Introduction

• Presenter: Craig
• Focus: Monetary and Fiscal policy

Monetary Policy

• Definition: Regulation of the money supply by the government to influence a nation's economy.
• Central Institution: Federal Reserve System (The Fed)
  • Created in 1913
  • Functions as the central bank
  • Consists of 12 regional banks
  • Governed by Federal Reserve Board of Governors and Federal Open Market Committee

The Fed's Primary Tasks

1. Control inflation
2. Encourage full employment

Functions of the Federal Reserve

• Clearing checks
• Supplying currency
• Setting rules for banks
• Loaning money to banks and setting interest rates
  • Interest Rate: Discount rate determines borrowing levels
  • Bank Reserve Requirement: Fractional reserve banking to prevent bank runs
  • Open Market Operations: Buying/selling government bonds

Impact on Economy

• Interest Rates: Affects borrowing and money circulation
• Inflation: Related to money supply but not strictly predictable
• Independence: The Fed operates independently to avoid political influence

Fiscal Policy

• Definition: Government’s power to tax and spend
• Challenges: Reluctance to raise taxes or increase spending

Tax Policy

• Influence of supply-side economics
  • Lower taxes to stimulate economic growth
  • Trend towards lower and less progressive federal taxes
• Tax Revenue:
  • Federal taxes constitute between 43% and 50% of revenue
• Government Deficit:
  • Spending exceeds revenue
  • Borrowing through bond sales

Government Spending

• Mandatory Spending: Uncontrollables written into law
  • Interest on federal debt
  • Social Security and Medicare
  • Political challenges due to aging population and voting patterns
• Discretionary Spending: Defense and other programs
  • Largest: Defense ($600 billion in 2013)
  • Second: Medicaid ($498 billion in 2013)

Conclusion

• Monetary Policy: Major tool for economic influence due to limitations in fiscal policy
• Overall Concept: Understanding the interplay between the Fed, taxes, and spending is crucial for grasping U.S. government economic strategies.

Acknowledgements

• Produced in association with PBS Digital Studios
• Supported by Voqal
• Thanks to all contributors involved in production.