Download Economic Policy ALM Voiceover Script Slide 1: Economic Policy

Economic Policy ALM Voiceover Script
Slide 1: Economic Policy: The Connection Between Government and Economics
In this Animated Learning Module, you will learn about economic policy and the connection
between government and economics.
Slide 2: Policy: The Effort Made to Achieve Some Outcome
A policy is the effort to accomplish a particular goal. The goals of economic policy are growth,
stability, low unemployment, and low interest rates.
Growth occurs when the gross domestic product or GDP increases. The GDP is a measure of the
economy tied to what is produced. An increase in production is a positive measure of the
economy.
Stability means there are minimal variations in the measurement of the economy. Variations
make it difficult to plan future activities.
Low unemployment means that more people are working and generating demand for goods and
services as well as paying taxes. When unemployment rises, fewer people are paying taxes and
generating less demand.
Low interest rates mean the cost of borrowing money is cheaper, making it possible to consume
more. When consumption goes up, production goes up.
Economic conditions determine which actions are taken by the government. For example, when
the economy is growing, there is fear that it will lead to inflation. Inflation is the condition of
too many dollars chasing too few goods. This results in the devaluation of the dollar.
Ultimately, your pay goes down because you need more dollars to buy what you want.
The economy sometimes declines in GDP, causing it to head towards a recession. If this decline
occurs over two economic quarters then there is a recession. If this declining GDP continues and
causes a severe economic decline we would call it a depression.
Slide 3: Government Influence: What Can It Do?
Now, let’s take a look at some of the things government can do to influence the economy.
Taxes are a means of generating revenue for the government; however, it also takes money out
of the economy. This has the ability to slow the economy down.
One form of tax is the progressive income tax. It is called progressive because the burden of the
tax goes up as you earn more money.
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Sales taxes are regressive because they put a burden on the poor. The poor have less money after
buying the same goods as the wealthy because the tax rate is uniform.
Property taxes are typically based on the value of property and represent a considerable expense
to homeowners. For example, taxes paid to a school district are a drain on a particular
community. Often, homebuyers will look for the communities with lower property taxes before
buying.
Excise taxes are often applied to certain products such as gasoline. Every gallon of gasoline
purchased in America is taxed, which pulls money from the economy.
Although there are many different taxes, we will end with the Social Security tax, which
represents 6% of your income. Your employer also pays 6% of your income in Social Security
taxes.
Besides taking money out of the economy, government can spend and put money into the
economy.
This spending can come in the form of social welfare programs. This redistribution of wealth
can impact portions of the economy.
Spending can also come in the form of public goods, such as infrastructure projects. The
influence only benefits the segment of the economy using the money, such as a construction
project to build a new bridge.
Recently, there has been a wave of bailouts for banks and car companies. This is sometimes
called corporate welfare.
Slide 4: The Economy is Cyclical
The economy experiences something known as the business cycle. In other words, the economy
goes through changes based on normal business activity. For example, swimsuits are in greater
demand in the summer and may cost more. Wool hats are in less demand in the summer and
may cost less. Producers ramp up production to meet demand and may hire more workers.
When demand is low, employers may let employees go.
The most sought after condition is growth. Simply put, demand for goods and services are
causing producers to produce more and hire more workers.
One cycle of the economy we want to avoid is inflation. Remember, inflation is the result of too
many dollars chasing too few goods. In other words, the general level of prices goes up so that it
appears as if your income goes down.
Recession is another condition that we want to avoid. Recession officially occurs when there are
two consecutive economic quarters of negative GDP. In other words, the economy is shrinking.
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Depression may be the worst of all conditions because it represents a significant downturn in the
economy, such that there is no growth over a long period of time.
Government seeks to influence the economy at each of these points in the cycle; however, there
is a special policy in which the government can be limited, thus allowing the free market to
improve on its own. This is sometimes referred to as supply-side economics.
As you learned earlier, growth is best evidenced by an increasing GDP. However, growth can
also be realized by a decreasing unemployment rate. As more individuals enter the workforce,
they spend their money, creating greater demand. Demand drives production. Production drives
further employment and so on.
The trigger for such economic activity comes from lowering taxes. When taxes are lowered, it
frees up the money that people have earned, allowing them to spend more and drive production.
In the long run, this means greater revenue for the government because more people are working
and paying taxes.
Slide 5: Fiscal Policy: Tax and Spend
Fiscal policy is a tool of government, which involves taxing and spending to influence the
economy. Typically, when there are signs of a recession, some believe it is best for the
government to spend enormous sums of money to get the economy going. Others believe that
this approach has no real impact on the economy and only increases deficits and debt.
Slide 6: Fiscal Policy
Fiscal policy says that the government should spend less and tax more when the economy is
growing too fast in order to avoid inflation. This tightens the economy.
And, when the economy is moving toward recession, fiscal policy says that government should
spend more and tax less. This causes the economy to loosen.
Remember, in the first case the idea is to take money out of the economy. In the second case the
idea is to put money into the economy.
A significant problem with this approach is that we don’t know with great certainty where the
economy is going, we only know where the economy has been. When fiscal policy is applied at
the wrong time, it could make things worse.
Slide 7: Monetary Policy
Another approach to achieving economic growth and stability is called monetary policy.
Monetary policy deals with the supply of money in the economy. Basically, monetary policy
says that the supply of money should be limited or reduced to slow an economy down.
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When the economy is not doing well or experiencing a recession, money should be put in the
economy.
The Federal Reserve is the institution responsible for monetary policy along with the Treasury.
Treasury bills can be bought and sold by the government to move money in and out of the
economy. Interest rates on loans between banks and the Federal Reserve can also influence the
flow of money in the economy.
Monetary policy is preferred by some over fiscal policy because we know more about the present
supply of money than we do about where the economy is going.
Slide 8: Regulation Represents Cost
Regulation is a typical approach by the government to influence aspects of the economy. For
example, banks may be required to make certain types of loans that they might not otherwise
make in a true free market economy. Whether it is investment firms, automobile manufacturers,
insurance companies, or energy companies, regulation costs money. The cost experienced by
these firms is typically passed on to the consumer in terms of higher prices. These higher prices
have a similar effect as inflation.
Slide 9: Borrowing Leads to More Expense
Some believe that the government can borrow money to meet its obligations and continue to
function well in the economy and avoid raising taxes or printing more money. Borrowing,
however, leads to more expense because borrowed money must be paid back with interest adding
more to the debt. As of this moment, the national debt is approximately 13 trillion dollars.
Slide 10: Printing Decreases Value
Finally, government sometimes prints additional money to influence the economy. The theory is
that if you print more money and put it in circulation, people will have greater access and spend
it. However, what this actually does is lower the value of money requiring you to spend more.
Essentially, it creates inflation because there is too much money chasing too few goods.
Slide 11: Critical Thinking Questions
1. What does fiscal policy require when the economy is growing?
2. What does fiscal policy require when the economy is slowing?
3. What are the consequences of monetary policy?
4. What are the consequences of inflation?
5. What are the consequences of taxation and regulation?
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