Download Government`s Role in the Economy

GOVERNMENT’S ROLE
IN THE ECONOMY
GOVERNMENT’S ROLE IN THE ECONOMY
• Creates millions of jobs
• Improves the country’s economic infrastructure- the network that enables producers and
consumers to participate in the economy
• Transportation systems, public facilities
• Provides loans to small businesses, collects taxes, provides services to the people
• The government also influences the economy through regulation, fiscal policy, and
monetary policy...
GOVERNMENT REGULATION:
PROTECTING WORKERS
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Government regulation has four main goals:
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Protect workers
Protect consumers
Limit negative effects
Encourage competition
Protecting Workers:
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Govt. prevents businesses from taking unfair advantage of
workers
Protect against discrimination (EEOC) and unsafe working
conditions (OSHA)
GOVERNMENT REGULATION:
PROTECTING CONSUMERS
• FDA protects people from unsafe foods
and medicines
• CPSC make certain that consumer items (i.e.
toys) are not dangerous
• SEC protects investors from being cheated
when they purchase stocks
• FDIC insures banks can always back up
your deposits up to $100,000
GOVERNMENT REGULATION:
LIMITING NEGATIVE EFFECTS
• Another goal of government regulation is
to limit the negative effects of some
economic activities
• Pollution for example
• EPA creates rules to limit negative effects
like air and water pollution
GOVERNMENT REGULATION:
ENCOURAGING COMPETITION
• Competition can benefit consumers (drive
down prices) and help the economy grow
(producers look for new, innovative ways
to increase efficiency/earn profits)
• Government regulations make certain
companies compete fairly with each other
GOVERNMENT REGULATION OF
PRIVATE PROPERTY
• Government does have the
power to regulate use of
property
• If it benefits society and the
economy
• Control land use through zoning
laws
• Limit what type of business,
industry, or neighborhood can be
built where
FISCAL POLICY- TAXES
• Federal government changes tax rates to affect the economy
• Lower taxes means people have more money to spend on goods and services
• Businesses sell more and hire new employees, but government revenue is cut
• Government may raise taxes to slow down economic growth (inflation)
• Tax Incentives- special tax deduction for doing something in particular
FISCAL POLICY- GOVERNMENT SPENDING &
PUBLIC TRANSFER PAYMENTS
GOVERNMENT SPENDING
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PUBLIC TRANSFER PAYMENTS
Increases in government spending can increase
demand and producers can hire workers to
meet new demand
• Money given by the government to
Government can spend less on goods and
services to control economic growth
• Providing assistance to
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Demand declines, so businesses produce less and
prices will not rise rapidly
someone in need
• i.e. unemployment compensations
unemployed/disabled means these
people can still contribute to the economy
by purchasing goods and services
FISCAL POLICY & TIMING
• Fiscal policy must be applied at the right time in order to work
• The amount of time fiscal policy tools can take to work may present a
problem
• Positive effects of tax cuts may take months or years to show up
• Fiscal policy is used with long-term effects in mind
MONETARY POLICY
• Determines the amount of money
available in the economy at any one time
• Used to promote economic stability
• Government can promote or slow
economic growth by controlling the
supply of money
• Federal Reserve Bank, or the “Feds” control
monetary policy in the U.S.
MONETARY POLICY
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Before Fed can control amount of money available, it has to know how much money is already in
the economy
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Several methods:
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Easy-Money Policy increases the amount of money in the money supply
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Count only money that is readily available (cash, coins, checks)
Also count money in savings accounts or other certificates of deposit (CDs)
Other economists also consider investments such as savings bonds
Overall demand increases, encourages economic growth
Tight-Money Policy raises interest rates to discourage borrowing, and the amount of money
borrowed declines
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Consumers make fewer purchase, businesses do not expand, overall demand declines so prices do not rise too
quickly
TOOLS OF MONETARY POLICYOPEN-MARKET OPERATIONS
• Open-Market Operations is the buying and selling of government securities
• These are bonds that the government sells to investors
• If the Fed wants the money supply to contract, it sells government securities
• Money used to invest in these bonds is removed from the money supply
• If the Fed wants the economy to expand, it buys government securities back from investors
• Money investors receives from the bonds go back into the money supply; more money = increases in
demand
TOOLS OF MONETARY POLICYDISCOUNT RATE
• Discount rate is the interest rate the Fed charges to banks
• If the Fed wants the economy to grow, it lowers the discount rate so banks borrow more
money
• They loan this money to borrowers
• If the Fed wants to slow economic growth, it raises discount rates, so banks pass the
higher interest rates on to borrowers so fewer people borrow money
• Money supply contracts, economy does not grow as quickly
TOOLS OF MONETARY POLICYRESERVE REQUIREMENT
• Reserve Requirement is the mount of money banks must have available in their vaults or
in Federal Reserve accounts
• If the Fed wants to expand the money supply, it lowers the reserve requirement
• If the amount of money a bank has to have on reserve is lower, it will try to loan more money
• If the Fed wants to slow economic growth, it raises the reserve requirement
• If the amount of money a bank has to have on reserve is higher, it will have less money to loan to
customers
• Individuals and businesses have less to spend- demand drops and economic growth slows
MONETARY POLICY & TIMING
• Fed must determine the current state of the economy before making monetary
policy decisions
• Fed must decide the best way to use monetary policy at that specific time
• Have to determine the time it will take for businesses and investors to adjust to
changes in monetary policy