I digress. Towards the later part of my teaching career my principal told me that since I had previously taught grade level Economics, he had full faith that I could teach the AP Macroeconomics course in which students could receive college credit. I was handed the teacher text and nothing else. I am embarrassed to admit that I didn’t even teach the graphs the first year because I did not understand them and I had no support. I was saved by the nicest AP Macro teacher in Dallas, Texas (Ken Norman) who sold his power points and materials. I basically taught myself.
Ok, so what is my point? I want to see how well you understand the economy. Yes, we all know when it seems times are good and when the news says times are bad. But, do you understand who makes these decisions, how they are made, and the solutions in place to solve the problems?
Everyone has seen those Government quizzes that test your knowledge of how good of a citizen you are. I’m going to give you a short quiz on how well you know your economy. When you watch the evening news or read an article about the economy, do you understand everything they are reporting? If you are super motivated you can try and answer these questions before I give simplified answers.
1. What is the difference between fiscal policy and monetary policy?
2. What is OMO (Open Market Operations)?
3. What is the difference between a stock and a bond?
First, my last year teaching was at a very upper class school. One of my assignments was the kids had to ask 10 adults what OMO was and to explain it. I will happily report that 95% of these adults (lawyers, doctors, engineers, etc) did not know the answer. Most Americans don’t know the answer. Heck, I didn’t know the answer until a few years after I had to know the answer.
TAXES, GOVERNMENT SPENDING
1a. Fiscal Policy are the tools the politicians
have to speed up or slow down the economy. Basically taxes and government spending. If we are at the peak of our business cycle (think Bill Clinton, everyone has jobs and money) you want to cut government spending and raise taxes- contractionary fiscal policy). If we are at the trough (the horrible recession we are getting out of) lower taxes and raise government spending- expansionary fiscal policy.
OPEN MARKET OPERATIONS, RESERVE REQUIREMENT, DISCOUNT RATE
1b. Monetary Policy are the tools the Federal Reserve (privately owned, but publically managed) has to speed up or slow down the economy. Open Market Operation, Discount Rate, Reserve Requirement. OMO is the most important and least understood. Reserve Requirement (amount banks have to keep in vaults (10%) hasn’t changed in many years. Discount Rate is the most publicized, but least used (amount the Fed charges banks to borrow money).
2. OMO is the buying and selling of bonds by the Federal Reserve.
3. A stock is part ownership in a company and a bond is a loan. If someone has a company and needs a loan, but they don’t want to give up ownership to their company, they sell bonds.
The government sells bonds when they need YOU to LOAN THEM MONEY!!!
You can buy stock in Starbucks, Walmart and Coca Cola. You can’t buy stock in HEB and other privately owned companies.
Back to OMO. This is the most important tool the Fed has to control the economy (speed up or slow down depending upon things like unemployment rate, GDP, etc).
It basically resolves around controlling the amount of money in our economy.
If we are in a recession the Fed will want us to spend our money (go out to eat, buy TVs, etc).
They will buy bonds back from the public so the public will have money to buy things.
They will discourage INVESTORS from buying government bonds by making them very expensive and giving a low interest rate.
When we are at the PEAK (everyone has jobs/money) the government will want to slow down our spending to control inflation.
The Fed will SELL BONDS to take money out of our hands (they don’t want us buying that extra tv). They will do this by making government bonds attractive to investors- very cheap to buy and you will earn high interest rates.