Chapter 16: Government and the Economy

1. Chapter 16: Government and the Economy

2. Why Is Government Involved in the Economy? • We continue to debate the proper role of the government in dealing with the economy. • At times, a less active government is seen as more important. • However, a more active government may seem necessary (e.g., airline industry bailout).

3. The Role of Government • Managing the economy • Protecting the welfare and property of individuals • Regulating competition • Providing public goods

4. Should Government Be Involved in the Economy? • What are the main arguments in the debate over the proper role of the government in the economy?

5. Economic Theory • Laissez-faire capitalism • Keynesians • Monetarists

6. Classical Economics • Adam Smith and The Wealth of Nations • The government that governs least is the government that governs best. • Government should not compete with the private sector.

7. Keynesian Economics • The Depression was the product of declining demand. • Government could use deficit spending to fund programs to stimulate demand. • Government should reduce spending once the economy recovers.

8. What Are the Goals of Economic Policy? • Promote a strong and stable economy • Promote business development • Promote international trade • Regulate industrial relations • Protect the environment • Protect consumers

10. What Are the Tools of Economic Policy • Monetary policy • Discount rate • Reserve requirement • Open market • Federal funds rate • Fiscal policy • Taxation • Spending and budgeting • Regulation and antitrust • Subsidies and contracts

11. Monetary and Fiscal Policy • Taxes • Fiscal policy • Budgeting and spending using subsidies and contracts • Deficit spending • Monetary policy • Use of credit and interest to control demand of money and consumption

13. Monetary Policy • Monetary policy is exercised by the Federal Reserve Board. • Monthly adjustments in the interest rate are designed to stabilize the inflation rate and promote a stable economy.

14. The Federal Reserve Board • The Federal Reserve System was created in 1913 • Federal Reserve Bank • Federal Reserve Board • Chairman (four-year term) • Six governors (fourteen-year terms)

15. The Federal Reserve BoardMonetary Strategies • Discount rate • The setting of interest on loans to member banks • Open market operations • The buying and selling of government securities • Reserve requirements • The amount of liquid assets and ready cash that banks are required to hold to meet depositors’ demands

16. The Federal GovernmentOther Strategies • Federal Funds Rate involves the interest rate on loans between banks. • FDIC • FSLIC

17. Fiscal Policy • Fiscal policy is generally exercised by the president and Congress. • Taxing and spending levels are adjusted to affect the economy.

18. Taxes • Taxes are used to redistribute money from one sector of society to another. • Taxes can also be used to encourage or discourage certain types of behavior.

19. Taxation • Tariffs • Sixteenth Amendment (1913) • Authorizes Congress to tax incomes • Progressive taxation • Income tax • Regressive taxation • Sales tax • Social Security

20. Regulation • Administrative regulations are rules made by regulatory agencies and commissions to control specific areas. • OSHA regulates workplace safety; noncompliance may result in fines or other penalties.

21. Subsidies • Subsidies are government grants of cash or other valuable commodities to promote certain activities. • Crop subsidies used to promote stable crop levels

22. Contracts • Contracts are agreements with individuals or firms in the private sector to purchase goods or services. • Military contracts used to develop defense systems

23. The Politics of Economic Policy • A healthy economy is the goal of both parties. • However, differences exist as how best to achieve this objective in terms of political parties and interest groups.