Download 13 - Midlakes

15
Economic Policy
Conditions Required for a
Market Economy
• Government has a role to play in a market
economy:
– Ensure law and order
– Secure property rights
– Enforce contracts
• There is a need for public policies – laws,
rules, statutes, or edicts that express the
government’s goals for rewards and
punishments to promote their attainment
Public Goods and
Externalities
• Public goods are services that in most
cases are not provided by the free market
• Examples:
– Infrastructure
– Education
– Military
• Externalities are secondary impacts
resulting from market exchanges
Creating a Labor Force and
Promoting Competition
• Governments have an interest in
maximizing the productivity of their labor
force
• Monopolies threaten the proper function of
free markets
Market Failures and
Collective Responses
• Some market problems:
– Unequal information
– Bubbles – Speculative buying drives the price
of major commodities (like real estate) to
levels far exceeding their intrinsic value
– Externalities – The difference between the
private and social cost of economic behavior
• We want government to correct for these
problems with carrots and sticks
Clicker Question
Which of the following is NOT considered to
be a role for government in ensuring the
proper function of markets?
A. Creating monopolies
B. Creating law and order
C. Securing property rights
D. Enforcing contracts
Goals of Economic Policy
• Market stability
– Law and order
– Ensuring competition
– Consistent regulatory structure
• Promoting prosperity as measured by
– Economic growth
– Income and employment
– Low Inflation
Changes in Real Gross
Domestic Product, 1960–2010
Full Employment
• During the Great Depression, the federal
government assumed the responsibility for
job creation
• Keynesian economics emerged as the
dominant economic theory to restore
economic growth and employment
Tools for Promoting
Economic Growth
• The Federal Reserve Bank can promote
economic growth by lowering interest rates
• Regulatory agencies like the Securities
and Exchange Commission (SEC)
promote consumer confidence
• Government investment in science and
technology can lead to long-term
innovation
Tools For Economic Growth
• Subsidies – A government grant of cash or
other valuable commodities, such as land,
to an individual or organization; used to
promote activities desired by the
government to reward political support, or
to buy off political opposition
• Loans/grants
• Tax Breaks
Clicker Question
The Federal Reserve Bank can regulate
economic growth by:
A. providing tax breaks to business owners.
B. increasing or decreasing interest rates.
C. providing loans to business owners.
D. regulating insider trading.
Protecting Employers and
Consumers
• Government has a role to play in
managing relations between capital and
labor
• Many government agencies exist to
protect consumers from harm
Tools of Economic Policy
• Monetary policy regulates the economy
through increasing or limiting the
availability of credit
• The Federal Reserve Bank is a powerful
tool for monetary policy
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–
–
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Interest rates
Reserve requirements
Open market operations
Federal funds rate
Fiscal Policies
• Fiscal policy refers to the government’s
taxing and spending decisions
• The Treasury Department plays an
important role
• Taxation
– Tariffs, income tax, corporate tax, Social
Security taxes, excise tax
– Progressive vs. regressive taxation
Federal Revenues
US Budget Deficits and
Surpluses, 1962–2009
Clicker Question
Government decisions in the area of taxing
and spending are thought of as:
A. Keynesian economics.
B. regulatory policy.
C. fiscal policy.
D. monetary policy.
The Uncontrollables
Budget Outlays
The Economy and the
Environment
• There is a tension between promoting
economic growth and protecting the
environment
• Climate change represents a controversial
illustration
American Worries About
Environmental Problems
Clicker Question
According to Table 15.2, which of the
following environmental problems do
Americans worry about least? Why?
A. Plant and animal extinction
B. Air pollution
C. Toxic waste
D. Global warming
The Politics of Economic
Policymaking
• The two major political parties differ with
respect to economic policy
– Republicans tend to favor policies that
promote economic growth
– Democrats tend to favor policies that promote
the environment and social equality
• Since 2008, these arguments have
become more salient and they will surely
be the key dividing lines in 2012