Download Government and the Economy

Government and the
Economy
Role of Government
Money and Banking
The Federal Reserve
Government Finance
Role
The Role of Government
Private businesses create private goods- goods that can
be used by only 1 person (shoes, clothes)
The Gov’t creates public goods- goods that can be used
more than once by many (parks, roads)
Gov’t knows that providing these public goods is positive
for entire society externality
Gov’t makes sure monopolies do not form- a monopoly
forms when there is NO competition for a good/service
Antitrust laws are laws to control monopoly power and
promote competition
Gov’t worries when mergers occur when 2 or more
companies join together to form a single company
Role
Regulating the Market
1. Natural Monopolies- sometimes it
makes more sense to only have 1
company make a product gov’t must
regulate that company, however
2. Advertising and Product Labels- truth
in advertising
3. Product Safety- gov’t in charge of
recalls on faulty products
Role
Measuring the Economy
1. GDP measures economic growth total
amount of goods/services produced in a year
– Real GDP reflects growth of the economy after
inflation has been taken into account
– Economy does not remain steady at all times The
Business Cycle
Economy can expand- real GDP goes up (~10 yrs)
Recession- real GDP goes down
Role
2. Unemployment measures economic
growth- High UR= bad economy
– When UR is high, government uses fiscal
policy changes in gov’t spending to offset
UR
3. Inflation is a measure of the economy
when prices gradually increase, while
income remains the same reduces
purchasing power of consumer
Role
5. Stocks and the Stock
Market measure the
economy
–
–
–
–
Stock is a portion of a
company you can buy
Stock prices change
based on supply and
demand
Stocks are bought and
sold at a stock exchange
We measure the
economy based on an
average of the stock
prices of about 500
companies
Money and Banking
Money and Banking
Money has 3 functions:
– Medium of exchange
– Store of Value
– Measure of Value
Money is anything that people are willing to
exchange for goods- Coins and Currency are
the most popular
Money is valuable because we are positive
others will find it valuable too
Money and Banking
The Financial System
Ppl. take their money to banks and banks use
that money to lend to other ppl/bus.
Several types of banks
– Commercial banks- offer financial services to
individuals and businesses
– Savings and loan associations- typically loan
money to ppl. to buy homes
– Credit Union- banks that operate for a particular
business or group
Money and Banking
How Banks Operate
Banks are businesses- they are started by
investors
Banks need ppl to make deposits into checking
accounts and savings accounts
Sometimes customers loan the bank some
money for a limited time and then get their
money back, plus interest certificate of
deposit
Banks are in charge of making loans money in
circulation actually grows
Money and Banking
Changes In Banking
First bank of US was owned by Federal Gov’t 1791
Some states made their own banks and issued their own
currency
1863- The National Banking Act created a national
currency and combined state and federal banks
The Federal Reserve was created by the gov’t to be the
bank’s bank
Federal Deposit Insurance Corporation (FDIC)
promises to insure consumer’s money from crisis
Great Depression
Federal Reserve
The Federal Reserve System
This is the central bank of the US when banks
need money they come to the Fed
12 Federal Reserve Banks
The Federal Reserve is a gov’t agency and the
president selects the chairman
The Federal Open Market Committee makes
the decisions that affect the economy as a whole
by changing the money supply
Federal Reserve
Functions of the Fed
1. Acting as the Government’s Bank- holds
gov’t money, prints money, etc
Federal Reserve
2. Conduct Monetary Policy- control supply of
money
Fed can raise or lower the interest rate (how
much its costs to borrow money)
Fed can charge member banks more or less for
loans discount rate
Fed can raise or lower reserve requirement
amount of money banks are required to keep in
the Fed
Fed can change money supply through open
market operations- buying and selling US
bonds
Government Finance
The Federal Government
Congress and President work together to
create budget blueprint of how the gov’t
will raise and spend money
Gov’t uses Fiscal Year (12 month period)
Government Finance
The Budget Process
– February- P. proposes budget to Congress
– Congress passes budget resolution- adds
up how much spending and revenues for
country
Mandatory Spending: spending that does not
need annual approval (Social Security)
Discretionary Spending: gov’t spending that
must be approved each year (defense)
Congress passes appropriations billlaw to
approve spending
Government Finance
Revenues and Expenditures
– About ½ of revenue comes from income tax, then from
payroll tax to pay for Social Security and Medicare
Government Finance
3 types of Taxation
Progressive: The more you make, the more you
pay
Regressive: The percentage you pay goes down as
you make more money
Proportional: Same percentage of taxes regardless
of income
Gov’t spends most of its money
(expenditures) on Social Security
retirement money for elderly#2 is
national defense
Government Finance
Managing the Economy
Gov’t must learn to function with either a surplus
or deficit
When in debt, gov’t must use deficit
spending borrowing money to pay for bills
Gov’t sells bonds (promise to repay loan at a
later date, plus interest) to American ppl. to pay
for bills
The gov’t achieves a balanced budget when
spending equals revenue NC must have a
balanced budget
Government Finance
Impact of national debt
– Interest payments-gov’t must pay interest on
past debt, causing taxes to increase
– Interest rate- when gov’t borrows money, it
leaves less for citizens to borrow interest
rates increase
Government Finance
Fiscal Policy
Gov’t stimulates economy by lowering
taxes and increase spending
Economy has automatic stabilizers to help
citizens immediately
– Unemployment Benefits
– Progressive income tax