312 PART FouR • PolicymAking
Monetary Policy
The use of changes in
the amount of money in
circulation to alter credit
markets, employment, and
the rate of inflation.
Federal Reserve
System (the Fed)
The system created by
Congress in 1913 to serve
as the nation’s central
banking organization.surplus each year from 1998 to 2002. Some commentators predicted that we would be run-
ning federal government surpluses for years to come.
Back to Deficit spending. All of those projections went by the wayside because of
several events. One event was the “dot-com bust,” followed by the 2001–2002 reces-
sion, which lowered the rate of growth of not only the economy but also federal govern-
ment tax receipts. Another event was a series of large tax cuts passed by Congress in
2001 and 2003 at the urging of President George W. Bush. A third event took place on
September 11, 2001. As a result of the terrorist attacks, the federal government spent
much more than it had planned to spend on security against terrorism. The government
also had to pay for the war in Iraq in 2003 and the occupation of that country thereafter.
Finally, Congress authorized major increases in spending on discretionary programs.
The Great Recession (2007–2009) dramatically increased the budget deficit and the
level of public debt. Tax revenues collapsed, and spending on such items as unemployment
compensation rose automatically. In addition, immediately upon taking office, President
Obama obtained legislation from Congress that helped push the public debt to levels not
seen since World War II. Such high levels of debt became a major political issue.monetary Policy
Controlling the rate of growth of the money supply is called monetary policy. This policy
is the domain of the Federal reserve system, also known simply as the Fed. The Fed is
the most important regulatory agency in the U.S. monetary system.
The Fed performs a number of important functions. Perhaps the Fed’s most important
task is regulating the amount of money in circulation, which can be defined loosely as
checking account balances and currency. The Fed also provides a system for transferringNet Public Debt as a Percentage ofGD
P
120
100
80
60
40
20
0
1940 1950 1960 1970 1980 1990 2000
Year20102015
FiguRE 13–1: net Public Debt as a
Percentage of the gross Domestic Product
During World War II, the net public debt grew dramatically. It fell thereafter but rose again from
1975 to 1995. The percentage fell after 1995, only to rise dramatically after 2008.Sources: Bureau of Labor Statistics and Congressional Budget Office.Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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