Download Chapter 16 Government and the Economy

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?
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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 Board
Monetary 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 Government
Other 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.