● 3 Economic goals:

○ Real GDP (gross domestic product), limit unemployment, stable prices

● Money
○ Commodity- performs function of money w/alternate uses, like gold, and fiat
money- serves as money with no other alternate uses, like paper money and
coins
○ Medium of exchange, unity of account, or story of value is what money is used
for. Liquidity is the ease at which this can be access and converted into cash
● Federal Reserve Board, chaired by Jerome Powell
○ Regulatory institution that sets monetary policy by controlling amount of money,
bank deposits, and interests rates charged for money. GOAL: control inflation
and unemployment
■ Reserve Ratios
● reserve requirement is the percent of deposits a bank must hold in
reserve, cannot loan this out
● decreasing this ratio leads to excess bank reserves, and more
money supply, so the aggregate demand raises, and vice versa
■ discount rate
● lending money to banks and thrifts, the interest rate that the FED
charges commercial banks.
● increase money supply- decrease discount rate (easy money
policy) and vice versa (tight money policy)
■ Federal Funds Rate
● the interest rate that BANKS charge each other for one-day loans
of reserves
■ open market operations
● buy and sell bonds, which are securities (big and small)
● Monetarism:
○ too much money with too little goods leads to inflation
■ solve this: increase money supply at rate equal to economic growth, then
leave the market alone (classical thought)
○ Milton Friedman
● Government and economy:
○ Fiscal policy
■ actions made by Congress to stabilize the economy
■ discretionary/appropriations- annual limited spending, like defense and
agriculture, which can impact the aggregate demand
■ entitlements- unlimited spending, mandatory provisions, for
medicaid/care, social security, welfare
■ non discretionary- interest on national debt
■ Contractionary: reduce inflation/decrease GDP, decrease gov spending,
tax increase, budget surplus
■ Expansionary
 ● reduce unemployment and increase GDP, increase gov spending,
decrease taxes, leads to budget deficit
○ Monetary policy
■ actions by the Federal Reserve Bank to stabilize the economy
● Keynesianism
○ the health of the economy depends on how much of their incomes people save
or spend. When demand is low, the government should put money into the
economy by spending more than it taxes
■ wages are sticky
■ demand based on amount of disposable income
■ use fiscal policy (congress) and government to steer economy through
booms and busts
● Problems:
○ Deficit spending
■ expenditures exceed revenue, an accumulation of budget deficits over
time (happens when spending is increased without increasing taxes).
○ Timing
■ recognition/administrative/operational lag- it takes time to process,
organize, execute, etc.
○ Politically motivated policies
■ economically inappropriate policies get passed to try and get reelected
○ Crowding out
■ government spends too much and weakens consumer spending
● Supply side economics
○ incentives to work, save, and invest
■ lower taxes on people and corporations
■ Laffer curve theory: lower taxes create same tax revenues
○ Reaganomics
■ government deregulation in free market, leave the market alone
● Classical
○ flexible prices, the market will fix itself, limited government