Week 6 - The Federal Reserve

Question 1

What are the features of a strong economic policy?

Answer 1

High employment, economic growth, price stability, and a favourable balance of payments (trade deficit)

Question 2

What is Fiscal Policy?

Answer 2

This is government spending on policies which influence macroeconomic conditions; these are based in the belief that government can change economic performance by adjusting taxes and public spending; mainly determined by US Congress and the President

Question 3

What is Monetary Policy?

Answer 3

This is the actions of a central bank, currency board or other regulatory committee which determines the size and rate of growth in money supply, which in turn affects interest rates. This is achieved through changing the interest rates along with altering the amount of money held in the reserve

Question 4

How does the Legislative Branch influence the economy?

Answer 4

Article I states that Congress have the power of the purse. Furthermore, taxation must begin in the House of Representatives and within Congress, there are several committees and institutions which can help with the process and these are Congressional committees and technical oversight agencies.

Question 5

Define the Federal Reserve

Answer 5

These are self - autonomous, independent federal agencies which have a dual mandate that looks to maximise employment and minimise inflation. The Securities Exchange Commission regulates financial transactions.

Question 6

What is the House of Ways and Means Committee - and what does it do?

Answer 6

Due to the Budget Impoundment Control Act of 1974, the Committee scrutinises the entire federal budget. It was established in 1802 and controls all taxation and appropriations policy and still oversees most of the US tax law. The Senate Finance Committee has similar responsibilities to the House of Ways and Means Committee - but the committee in the House of Representatives must vote first.

Question 7

Outline the Government Accountability Office (GAO)

Answer 7

It was created by the Budget and Accounting Act of 1921. It investigates the financial affairs of Executive Departments as well as examining the effectiveness of federal departments

Question 8

Outline the Congressional Budget Office (CBO)

Answer 8

This is a non - partisan agency who make sure that spending for party policies ‘adds up’. They provide objective and impartial analysis and sometimes they can be crucial in defining legislation and setting terms of political debates

Question 9

Why did Congress delegate powers to the President?

Answer 9

Because they struggled to work together through collective action to pass budgets

Question 10

Outline the Department of the Treasury

Answer 10

It is the main financial office of the US Government; the Secretary of the Treasury is the President’s chief economic advisor and the aim of the department is to co-ordinate economic policy

Question 11

What are the main goals of the Council of the Economic Advisors?

Answer 11

(1) Provide information to the President
(2) Write speeches for the President on economic policy
(3) Brief the President in advance of meetings
(4) Co - ordinate the President’s economic legislative programme
(5) Whatever else the President requires

Question 12

What is Deficit ?

Answer 12

The shortfall in difference between expenditure and revenues in a budget year

Question 13

What is Debt?

Answer 13

The accumulated costs of budget deficits over time

Question 14

What is a debt - ceiling ?

Answer 14

This is a limit set by Congress which specifies on how large the national debt is allowed to be i.e at what point the US Treasury must stop borrowing to finance the Federal Government’s Commitments

Question 15

Outline the Budget Approval Process

Answer 15

On the first Monday in February the President will submit their budget to Congress; nevertheless, it is virtually impossible to get it in on time as Trump’s was 15 weeks late and Obama was only on time once. On the 15th April, Congress agrees their version of budget and a month later on the 15th May, Congress proposes 12 appropriation bills. After this, throughout the periods of May to October - sub committees (one for each appropriation bill in each chamber of Congress - review the bills and then each chamber votes separately on the appropriations. And then on the 1st October, appropriation bills must be passed for start of the financial year (to be signed by the President).

Question 16

Why is the Federal Reserve crucial near election time?

Answer 16

As elections near, Governments have an incentive to pursue policies which have harmful medium - term inflationary effects i.e lower interest rates. Therefore, the federal reserve is there to attempt to remove Government manipulation of the monetary cycle for electoral gain

Question 17

What happened with the panic of 1907 ?

Answer 17

The panic of 1907 occurred when the stock value halved and the GDP contracted 11%. At this point, large proportions of bank loads had been secured by questionable securities as collateral and the panic only came to an end when rich banks such as JP Morgan and JD Rockerfeller stepped in and offered to guarantee liquidity to claim the markets.

This led to the creation of the Federal Reserve Act 1913

Question 18

Outline the Bretton Woods Agreement

Answer 18

It was established in 1944 and it replaced the gold standard with the US dollar as the global currency. It promised that their central banks would maintain fixed exchange rates between their currencies and the dollar.

Question 19

Why did the Bretton Woods Agreement Collapse?

Answer 19

It was a combination of inflation and recession - in response, Nixon started to deflate the dollar’s value in gold - revalued the dollar to 1/38 of an ounce of gold, then 1/42 of an ounce. As a result, people redeemed their quickly devaluing dollars for gold and in 1973, Nixon unhooked the value of the dollar from gold altogether and without price controls, gold shot quickly up to 120$ per ounce in the free market

Question 20

What was the most important aspect of the neoliberal era?

Answer 20

The central role of the states in discipling and integrating labour into new capitalist markets as workers, consumers, savers and home owners

Question 21

What triggered the Great Recession?

Answer 21

Large amounts of debt were owed by US households that were simply incapable of generating the income streams needed for their repayment. Banks had then ended up holding assets that they were unable to value and once a debt had been securitised - there was little hope of tracing the value of the resulting ‘new asset’

Question 22

What part did the Federal Reserve take in the Great Recession?

Answer 22

It acted as the world’s central bank by repeatedly supplying other central banks with dollars to provide liquidity to their banking systems, whilst doing the same for Wall Street

Question 23

Is there a correlation between the Presidential electoral success and the economy?

Answer 23

Yes, the major recessions in the post - war period register as significant downturns in support for the President’s program. Furthermore, the public’s response to Presidents’ actions in the economy can play a central role in the process of democratic accountability

Question 24

How does Government Policy affect national economic well - being?

Answer 24

I) The overall growth of the economy

II) Distribution of wealth and income that reflect the value of the goods produced

As a result of this, all parties have a strong incentive to ensure that the economy is growing as the election approaches

Question 25

What contributed to Nixon’s success in the 1972 election?

Answer 25

Running up to the election, it appeared that economic growth would be flat or declining. As a result, he lost patience with his economic advisors and brought in John Connolly who implemented a dramatic program that combined economic stimulus with wage and price controls. Although it was not a sustainable policy, the combination produced several months of non - inflammatory growth in the period before the election - Nixon as a result experienced a landslide election

Question 26

What are the two policies that influence the distribution of economic well - being ?

Answer 26

I) Compensatory tax and transfer program: programs such as social security, unemployment insurance, subsidised healthcare for low families along with a system of progressive taxation of income and wealth i.e. the cluster of policies enacted together under the Poverty Program in the Johnson year, moved the distribution of income toward more equality, while the Reagan tax and budget cuts of 1981 increased inequality

II) Macroeconomic policies that influence the rate of growth: slower overall growth and increases in unemployment produce income shifts from the lower portion of the distribution toward the top, whilst faster growth strengthens the purchasing power of families lower down the scale

Question 27

What does guiding the national economic context of political accountability involve?

Answer 27

Shaping policy so that is serves both the growth of material productivity as well as offering the opportunity and legitimacy to become involved in democratic participation

Question 28

What are the four indicators of Presidential accomplishment?

Answer 28

Support for the President’s program in Congress

The public’s evaluation of his economic management

The impact of the President’s decision on economic prosperity

The distribution of the economies outputs to different classes