Top Ten Things You Should Know About Economic Policy

For those economic amateurs, I have compiled a list of economic terms and concepts and defined each term. I may be using some of these terms in my future posts, so having this as a reference may be helpful!

1. Gross Domestic Product (GDP): Total of all the goods and services produced in the country during a given year.
2. Federal Reserve System (the “Fed”): There are seven members on the Federal Reserve Board who are appointed by the President and approved by the Senate. The Federal Reserve regulates the supply of money, the price of money and sets the monetary policy. It can set its monetary policy in the following ways:
a. Buying gov’t securities -> more money in circulation -> interest rates drop -> more money is borrowed and spent.
b. Selling gov’t securities -> less money in circulation -> interest rates rise -> less money borrowed and spent
c. Regulating the amount of money member banks keep as reserves to back up customer deposits. If bank must keep a larger amount of the deposits than lending it out, then loans become harder to get and interest rates rise.
d. Changing the interest rate (know as discount rate) for banks that want to borrow money from the Federal Reserve System for short-term needs.
There are also 12 Regional Federal Reserve Banks that buy and sell government securities, loan money to member banks, and keep a percentage of holdings for member banks . The interest rates the member banks must pay to regional banks influence their own interest rate for business and personal loans.
3. Monetarism: The belief that inflation occurs when there is too much money and too little goods. The government causes inflation by printing out too much money and a recession by cutting back on the money in circulation. As a result, the government must have an increase in the money supply equal to the growth in the economy’s productivity.
4. Keynesianism: The belief that the economy’s health is dependent upon how much people spend or save. The task of the government is to create the right level of demand. If the demand is great (when people spend too much) and inflation occurs, the government needs to cut spending. If the demand is too little (when people save too much) and a recession occurs, the government needs to spend money.
5. Economic Planning: The belief that government should plan the economy through wage and price controls and direction of the investment. Especially during inflation, the government should regulate wage and price controls, at least in larger industries.
6. Supply-side Theory: The belief that there should be less government interference and taxes should be cut. Cutting taxes will -> increased investments -> more jobs -> greater productivity of economy -> more people that are richer (because of the “trickle-down” of the money supply
7. Reaganomics: The belief that monetarism, supply-side tax cuts and domestic budget cutting would reduce the size of the federal government, stimulate economic growth and increase military strength. The result was that Reagan created a huge budget deficit while reducing unemployment.
8. Congress: Congress approves all taxes, almost all expenditures, wage or price controls and the policy of Federal Reserve Board. The decisions Congress makes regarding economic issues, such as how high taxes should be and how much money the government should spend, constitutes the nation’s fiscal policy.
9. Troika: Three people who advise the president on economic policy making. These people are:
a. Chairman of the Council of Economic Advisers (CEA) : The CEA is a group of experts who forecast economic trends, analyze economic issues and prepare economic reports for Congress.
b. Director of the Office of Management and Budget (OMB) : OMB prepares estimates of how much federal agencies will spend, negotiates with other departments over the budget sizes and makes sure legislative proposals are in accord with president’s program.
c. Secretary of the Treasury provides estimates of revenue from taxes and the result of changing tax laws. The secretary also represents the US when dealing with other nations in economic issues.
10. Income Tax: A way for the government to get revenue from the people. It is a progressive tax, meaning that the more rich a person, the more he/she has to pay as taxes. The income tax allows majoritarian politics to become class politics. There are many loopholes; usually, the rich capitalize on these loopholes. W/o loopholes, economy would probably suffer.

Whew. I need a break. Anybody up for some monopoly?

--Dr. ECON