Post on 01-Jan-2016
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Chapter 16: Government and the Economy
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).
The Role of Government
• Managing the economy
• Protecting the welfare and property of individuals
• Regulating competition
• Providing public goods
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?
Economic Theory
• Laissez-faire capitalism
• Keynesians
• Monetarists
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.
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.
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
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
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
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.
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)
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
The Federal GovernmentOther Strategies
• Federal Funds Rate involves the interest rate on loans between banks.
• FDIC
• FSLIC
Fiscal Policy
• Fiscal policy is generally exercised by the president and Congress.
• Taxing and spending levels are adjusted to affect the economy.
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.
Taxation
• Tariffs• Sixteenth Amendment (1913)
– Authorizes Congress to tax incomes• Progressive taxation
– Income tax• Regressive taxation
– Sales tax– Social Security
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.
Subsidies
• Subsidies are government grants of cash or other valuable commodities to promote certain activities.
– Crop subsidies used to promote stable crop levels
Contracts
• Contracts are agreements with individuals or firms in the private sector to purchase goods or services.
– Military contracts used to develop defense systems
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.