Developing an Effective Parenting Style

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Government and the Economy
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Chapter Objectives

• Diagram and explain the four parts of the
  business cycle.
• Compare and contrast recession, inflation, and
  stagflation.
• Describe how the government uses fiscal and
  monetary policy to combat inflation and
  recession.
• Explain the economic consequences of government
  taxing and spending.

continued
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Chapter Objectives

• Explain how the national debt hurts the economy.
• Describe the governments role in promoting
  competition.
• Identify the laws and government agencies that
  protect consumer interests.

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Economic Conditions Monitored by the Government

• The business cycle
• Contraction period of slow or no growth
• Trough end of a contraction
• Recovery period when business activity begins to
  grow again
• Peak height of recovery

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Recession and Depression

• Recession
• Extended period of slow or no economic growth
• Two or more quarters of negative growth
• Depression
• Occurs when a recession lasts several years or
  more
• Example The Great Depression of the 1930s

continued
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Recession and Depression

• Depression is characterized by
• high unemployment
• decline in retail sales
• lowered average personal incomes
• decreases in consumer spending
• reduced spending by businesses

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Inflation

• Inflation threatens the nations prosperity
• Todays dollars buy less than last years dollars

continued
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Inflation

• Demand-pull inflation
• Occurs when the economy is growing
• As demand goes up, prices go up
• Cost-push inflation
• Triggered by price increase of a widely used
  good, such as oil

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Stagflation

• Stagflation is a period of slow growth and high
  inflation
• Best example occurred in the 1970s
• Raised oil prices triggered inflation
• Slow economic growth, high unemployment

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In Your Opinion

• What types of goods and services would likely
  cost more following increases in the price of
  oil?

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Impact of Unemployment and Underemployment

• Full use of productive resources, including labor
  force, ensures prosperity and stability
• Unemployment hurts workers, families
• Unemployment rate rises during periods of slow
  growth and contraction
• Government policies impact unemployment

continued
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Impact of Unemployment and Underemployment

• Types of unemployment
• Frictionaljob loss among workers temporarily
  between jobs
• Structuraljob loss among people whose skills are
  not in demand long-term
• Cyclicaljob loss during economic contraction
• Seasonaljob loss among people holding temporary
  seasonal jobs

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Underemployment

• Underemployment occurs when
• people want to work full-time but can only find
  part-time work
• people settle for jobs requiring fewer skills
  and/or education than they possess

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Factors Affecting Economic Policies

• Economic goals of government
• Moderate the ups and downs of business cycles

continued
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Factors Affecting EconomicPolicies

• Other economic goals of government
• Increase economic growth and prosperity
• Increase employment
• Keep inflation low
• Insure proper balance of trade in world markets

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Fiscal Policy

• Fiscal policy, which is determined by the U.S.
  Congress, can
• stimulate the economy in periods of recession and
  high unemployment
• slow economic activity in periods of inflation

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Gross Domestic Product

• Gross domestic product (GDP) measures economic
  growth and includes

• consumer spending
• investments by businesses
• net exports of goods and services
• government spending

continued
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Gross Domestic Product

• Real GDP is GDP adjusted for inflation
• Drop in GDP indicates weakening economy
• Rise in GDP indicates economic growth
• Unexpected spurt can indicate future inflation

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Consumer Price Index

• Consumer price index (CPI)
• Measures the movement of prices for a bundle of
  select goods and services
• Used to calculate cost-of-living increases for
• members of labor unions
• those receiving Social Security and pension
  benefits

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Fiscal Policy During Recession and Inflation

• During recession, fiscal policy is aimed at
  increasing the amount of money in circulation
• Government does this by
• increasing government spending
• lowering taxes so people have more money to spend

continued
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Fiscal Policy During Recession and Inflation

• During inflation, fiscal policy aimed at
  decreasing the amount of money in circulation
• Government does this by
• decreasing government spending
• increasing taxes so people have less money to
  spend

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Monetary Policy

• Monetary policy refers to actions by the Federal
  Reserve Board (Fed) to change the supply of money
• Fed regulates the nations money supply and
  banking system

continued
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Monetary Policy

• Federal Reserve System consists of
• Federal Reserve Board, headed by a chairperson
• 12 Federal Reserve Banks across the country
• Federal Open Market Committee

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Reserve Requirements

• Fed requires that banks and other financial
  institutions set aside a percentage of their
  total deposits
• High reserve requirement reduces amount of money
  banks have to lend
• Low reserve requirement increases amount of money
  banks have to lend

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Discount Rate

• Fed sets the interest rate commercial banks must
  pay for credit
• Fed tends to lower discount rate during economic
  slowdown
• Fed tends to raise discount rate during periods
  of inflation

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Open Market Operations

• Fed buys or sells Treasury securities (bonds,
  notes, bills)
• Fed increases money supply by buying securities
  (puts dollars into circulation)
• Fed decreases money supply by selling securities
  (takes dollars out of circulation)

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Easy Versus Tight Money

• Easy monetary policy speeds up the economy
  because
• interest rates are relatively low
• more credit is available
• consumers borrow and spend more, increasing
  demand
• businesses borrow and spend more, creating growth
  and new jobs

continued
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Easy Versus Tight Money

• Tight monetary policy slows down the economy
  because
• interest rates are relatively high
• less credit is available
• consumers borrow and spend less, decreasing
  demand
• businesses borrow and spend less, resulting in
  fewer jobs

continued
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Easy Versus Tight Money

• Manipulating the economy is difficult
• The U.S. is part of a complex global economy with
  many interconnected parts
• It often takes months for policies to bring about
  desired changes
• Solving one problem can cause others

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Taxing and Spending
continued
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Taxing and Spending

• Government buys goods and services from
  producers/sellers capital from consumers
• Producers/sellers and consumers/workers pay taxes
  and receive programs, goods, and services from
  government

continued
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Taxing and Spending

• Tax revenues pay for
• government operations
• services that private citizens cannot do
• items that private citizens do not produce

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Redistribution of Income

• Government redistributes income through
• progressive taxes (higher-income citizens pay a
  higher rate of tax)
• transfer payments (tax revenues pay for some
  financial assistance and benefits to certain
  individuals)

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Deficit Spending and the National Debt

• Deficit spending occurs when government spends
  more than it receives in revenues each year
• Surplus is created when government receives more
  than it spends

continued
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Deficit Spending and the National Debt

• Excess spending and borrowing increase the
  national debt
• Government must pay interest on the amount owed
  leaves less money to pay for other needs
• Taxpayers pay for the national debt in the form
  of increased taxes
• Debt threatens future economic growth

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Government Regulations

• Government involvement in the economy is growing
• Government regulation affects local, state, and
  federal levels
• Regulations seek to
• promote fair competition
• ensure public well-being and safety

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Fair Competition

• Perfect competition is when many buyers and
  sellers exist

continued
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Fair Competition

• Competition among multiple sellers results in
• lower prices for consumers
• better service
• greater innovation
• most efficient allocation of resources

continued
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Fair Competition

• Monopoly is when a single seller exists seller
  can control price and supply
• Oligopoly is when a few large sellers exist
  sellers can control price to a lesser extent than
  in monopoly

continued
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Fair Competition

• Lack of competition hurts consumers and the
  economy
• Governments anti-trust laws
• prohibit monopolies
• prohibit price fixing and collusion
• prohibit other unfair and deceptive trade
  practices
• promote competition and fair trade

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The Publics Well-Being and Safety

• Regulations require
• equal opportunity
• fair labor practices
• workplace safety

continued
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The Publics Well-Being and Safety

• Regulations also require
• environmental protection
• pure foods, drugs, and cosmetics
• product safety
• truth in advertising and labeling
• truth in lending and savings

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Costs of Regulation

• Regulations are costly because they
• create extra work and costs for businesses
• put businesses at competitive disadvantage with
  unregulated businesses
• create extra work and costs for government (and
  citizens through taxes)

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Government Agencies Serving Consumers

• Department of Agriculture (USDA)
• Food safety, food production, nutrition
  education, international trade

continued
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Government Agencies Serving Consumers

• Department of Energy (DOE)
• Promotes the development of reliable, affordable,
  and clean energy sources
• Department of Labor (DOL)
• Enforces labor laws, advances employment
  opportunities, provides labor statistics

continued
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Government Agencies Serving Consumers

• Department of Health and Human Services (HHS)
  includes
• Centers for Medicare Medicaid
• Office of Public Health and Science
• National Institutes of Health
• Centers for Disease Control and Prevention
• Food and Drug Administration

continued
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Government Agencies Serving Consumers

• Food and Drug Administration (FDA)
• Enforces food safety regulates drugs, tobacco
  products, cosmetics

continued
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Government Agencies Serving Consumers

• Social Security Administration (SSA)
• Manages retirement, survivors, and disability
  insurance and supplemental security income
  programs
• Dept. of Housing and Urban Dev. (HUD)
• Promotes fair housing, home ownership

continued
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Government Agencies Serving Consumers

• Consumer Product Safety Commission (CPSC)
• Enforces safety of consumer products
• Federal Trade Commission (FTC)
• Regulates advertising, promotes competition
• Securities and Exchange Comm. (SEC)
• Regulates security exchanges, protects investors
  from fraud

continued
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Government Agencies Serving Consumers

• U.S. Department of the Treasury
• Collects taxes, pays nations bills, regulates
  banks, investigates financial crimes
• Federal Communications Commission (FCC)
• Regulates communications by telephone,
  television, radio, cable, wire, and satellite

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Central Ideas of the Chapter

• The goal of government economic policies is to
  create economic stability and prosperity for its
  citizens.
• Government enacts laws and regulations to ensure
  fair competition and to protect the public
  well-being and safety.
• Government agencies at all levels assist and
  protect consumers by providing information,
  protection, and services.

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Glossary of Key Terms
Back

• business cycle. A cycle of economic activity with
  periods called contraction, trough, recovery, and
  peak.
• collusion. When companies make illegal secret
  agreements, usually to engage in price fixing or
  to shut out smaller competitors.

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Glossary of Key Terms
Back

• consumer price index (CPI). A measurement of
  changes in the prices of selected consumer goods
  and services.
• deficit spending. When government spends more
  than it collects in tax revenues and must borrow
  money.
• depression. An extended period of economic
  recession.

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Glossary of Key Terms
Back

• Federal Reserve System. The U.S. government
  system that regulates the nations money supply
  and banking system. It is comprised of the
  Federal Reserve Board, 12 Federal Reserve Banks,
  and the Federal Open Market Committee.

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Glossary of Key Terms
Back

• fiscal policy. The governments taxing and
  spending decisions.
• gross domestic product (GDP). The value of all
  goods and services produced by a nation during a
  specified period.
• inflation. An overall increase in the price of
  goods and services.

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Glossary of Key Terms
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• labor force. Composed of people, age 16 and over,
  who are employed or looking for and able to work.
  
• labor union. A group of workers who unite to
  negotiate with employers over issues such as pay,
  health care benefits, and working conditions.

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Glossary of Key Terms
Back

• monetary policy. Government actions that change
  the amount of money in circulation by controlling
  interest rates and credit terms.
• monopoly. A market situation in which one seller
  produces the entire output of a given product or
  service.
• national debt. The total amount the government
  owes at a given time.

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Glossary of Key Terms
Back

• oligopoly. A market situation in which a few
  large companies dominate an industry.
• perfect competition. A market structure in which
  competition between producers results in greater
  innovation, better service, lower prices, and
  efficient allocation of resources.

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Glossary of Key Terms
Back

• recession. An extended period of slow or no
  economic growth.
• stagflation. A period of slow growth and high
  inflation.
• tax. A fee imposed by a government on income,
  products, or activities, and paid by citizens and
  businesses.

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Glossary of Key Terms
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• underemployment. Workers who are employed only
  part time or who are over qualified for their
  jobs.
• unemployment rate. The percentage of the labor
  force that is out of work and seeking employment.