© goodheart-willcox co., inc.. 2 government and the economy
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© Goodheart-Willcox Co., Inc.
© Goodheart-Willcox Co., Inc.
2Government and the
Economy
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Chapter Objectives
• Diagram and explain the four parts of the business cycle.
• Compare and contrast recession, inflation, and stagflation.
• Describe how the government uses fiscal and monetary policy to combat inflation and recession.
• Explain the economic consequences of government taxing and spending.
continued
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Chapter Objectives
• Explain how the national debt hurts the economy.
• Describe the government’s role in promoting competition.
• Identify the laws and government agencies that protect consumer interests.
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Economic Conditions Monitored by the
Government• The business cycle
– Contraction: period of slow or no growth
– Trough: end of a contraction– Recovery: period when business
activity begins to grow again– Peak: height of recovery
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Recession and Depression
• Recession– Extended period of slow or no
economic growth– Two or more quarters of negative
growth• Depression
– Occurs when a recession lasts several years or more
– Example: The Great Depression of the 1930s
continued
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Recession and Depression
• Depression is characterized by– high unemployment– decline in retail sales– lowered average personal incomes– decreases in consumer spending– reduced spending by businesses
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Inflation
• Inflation threatens the nation’s prosperity
• Today’s dollars buy less than last year’s dollars
continued
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Inflation
• Demand-pull inflation– Occurs when the economy is
growing– As demand goes up, prices go up
• Cost-push inflation– Triggered by price increase of a
widely used good, such as oil
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Stagflation
• Stagflation is a period of slow growth and high inflation
• Best example occurred in the 1970s– Raised oil prices triggered inflation– Slow economic growth, high
unemployment
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In Your Opinion
• What types of goods and services would likely cost more following increases in the price of oil?
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Impact of Unemployment and Underemployment
• Full use of productive resources, including labor force, ensures prosperity and stability
• Unemployment hurts workers, families• Unemployment rate rises during
periods of slow growth and contraction• Government policies impact
unemployment
continued
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Impact of Unemployment and Underemployment
• Types of unemployment– Frictional—job loss among workers
temporarily between jobs– Structural—job loss among people whose
skills are not in demand; long-term– Cyclical—job loss during economic
contraction– Seasonal—job loss among people holding
temporary seasonal jobs
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Underemployment
• Underemployment occurs when– people want to work full-time but
can only find part-time work– people settle for jobs requiring
fewer skills and/or education than they possess
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Factors Affecting Economic Policies
• Economic goals of government– Moderate the ups and downs of business
cycles
continued
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Factors Affecting EconomicPolicies
• Other economic goals of government– Increase economic growth and
prosperity– Increase employment – Keep inflation low– Insure proper balance of trade in
world markets
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Fiscal Policy
• Fiscal policy, which is determined by the U.S. Congress, can– stimulate the economy in periods
of recession and high unemployment
– slow economic activity in periods of inflation
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Gross Domestic Product
• Gross domestic product (GDP) measures economic growth and includes
– consumer spending
– investments by businesses
– net exports of goods and services
– government spending
continued
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Gross Domestic Product
• Real GDP is GDP adjusted for inflation– Drop in GDP indicates weakening
economy– Rise in GDP indicates economic
growth– Unexpected spurt can indicate
future inflation
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Consumer Price Index
• Consumer price index (CPI)– Measures the movement of prices for
a bundle of select goods and services– Used to calculate cost-of-living
increases for• members of labor unions• those receiving Social Security and
pension benefits
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Fiscal Policy During Recession and Inflation
• During recession, fiscal policy is aimed at increasing the amount of money in circulation
• Government does this by– increasing government spending – lowering taxes so people have more
money to spend
continued
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Fiscal Policy During Recession and Inflation
• During inflation, fiscal policy aimed at decreasing the amount of money in circulation
• Government does this by– decreasing government spending – increasing taxes so people have less
money to spend
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Monetary Policy
• Monetary policy refers to actions by the Federal Reserve Board (Fed) to change the supply of money
• Fed regulates the nation’s money supply and banking system
continued
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Monetary Policy
• Federal Reserve System consists of– Federal Reserve Board, headed by
a chairperson– 12 Federal Reserve Banks across
the country– Federal Open Market Committee
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Reserve Requirements
• Fed requires that banks and other financial institutions set aside a percentage of their total deposits– High reserve requirement reduces
amount of money banks have to lend– Low reserve requirement increases
amount of money banks have to lend
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Discount Rate
• Fed sets the interest rate commercial banks must pay for credit– Fed tends to lower
discount rate during economic slowdown
– Fed tends to raise discount rate during periods of inflation
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Open Market Operations
• Fed buys or sells Treasury securities (bonds, notes, bills)– Fed increases money supply by
buying securities (puts dollars into circulation)
– Fed decreases money supply by selling securities (takes dollars out of circulation)
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Easy Versus Tight Money
• Easy monetary policy speeds up the economy because– interest rates are relatively low– more credit is available – consumers borrow and spend more,
increasing demand– businesses borrow and spend more,
creating growth and new jobs
continued
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Easy Versus Tight Money
• Tight monetary policy slows down the economy because– interest rates are relatively high – less credit is available – consumers borrow and spend less,
decreasing demand– businesses borrow and spend less,
resulting in fewer jobs
continued
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Easy Versus Tight Money
• Manipulating the economy is difficult– The U.S. is part of a complex global
economy with many interconnected parts
– It often takes months for policies to bring about desired changes
– Solving one problem can cause others
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Taxing and Spending
continued
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Taxing and Spending
• Government buys goods and services from producers/sellers; capital from consumers
• Producers/sellers and consumers/workers pay taxes and receive programs, goods, and services from government
continued
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Taxing and Spending
• Tax revenues pay for – government operations– services that private citizens cannot
do– items that private citizens do not
produce
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Redistribution of Income
• Government redistributes income through– progressive taxes (higher-income
citizens pay a higher rate of tax)– transfer payments (tax revenues
pay for some financial assistance and benefits to certain individuals)
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Deficit Spending and the National Debt
• Deficit spending occurs when government spends more than it receives in revenues each year
• Surplus is created when government receives more than it spends
continued
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Deficit Spending and the National Debt
• Excess spending and borrowing increase the national debt
• Government must pay interest on the amount owed; leaves less money to pay for other needs
• Taxpayers pay for the national debt in the form of increased taxes
• Debt threatens future economic growth
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Government Regulations
• Government involvement in the economy is growing
• Government regulation affects local, state, and federal levels
• Regulations seek to– promote fair competition– ensure public well-being and safety
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Fair Competition
• Perfect competition is when many buyers and sellers exist
continued
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Fair Competition
• Competition among multiple sellers results in– lower prices for consumers– better service – greater innovation – most efficient allocation of
resources
continued
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Fair Competition
• Monopoly is when a single seller exists; seller can control price and supply
• Oligopoly is when a few large sellers exist; sellers can control price to a lesser extent than in monopoly
continued
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Fair Competition
• Lack of competition hurts consumers and the economy
• Government’s anti-trust laws – prohibit monopolies – prohibit price fixing and collusion– prohibit other unfair and deceptive
trade practices– promote competition and fair trade
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The Public’s Well-Being and Safety
• Regulations require– equal
opportunity– fair labor
practices– workplace
safety
continued
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The Public’s Well-Being and Safety
• Regulations also require– environmental protection– pure foods, drugs, and cosmetics– product safety– truth in advertising and labeling– truth in lending and savings
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Costs of Regulation
• Regulations are costly because they– create extra work and costs for
businesses– put businesses at competitive
disadvantage with unregulated businesses
– create extra work and costs for government (and citizens through taxes)
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Government Agencies Serving Consumers
• Department of Agriculture (USDA) – Food safety,
food production, nutrition education, international trade
continued
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Government Agencies Serving Consumers
• Department of Energy (DOE)– Promotes the development of
reliable, affordable, and clean energy sources
• Department of Labor (DOL)– Enforces labor laws, advances
employment opportunities, provides labor statistics
continued
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Government Agencies Serving Consumers
• Department of Health and Human Services (HHS) includes – Centers for Medicare & Medicaid – Office of Public Health and Science– National Institutes of Health– Centers for Disease Control and
Prevention– Food and Drug Administration
continued
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Government Agencies Serving Consumers
• Food and Drug Administration (FDA)– Enforces food
safety; regulates drugs, tobacco products, cosmetics
continued
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Government Agencies Serving Consumers
• Social Security Administration (SSA)– Manages retirement, survivors, and
disability insurance and supplemental security income programs
• Dept. of Housing and Urban Dev. (HUD)– Promotes fair housing, home
ownershipcontinued
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Government Agencies Serving Consumers
• Consumer Product Safety Commission (CPSC)– Enforces safety of consumer products
• Federal Trade Commission (FTC)– Regulates advertising, promotes
competition
• Securities and Exchange Comm. (SEC)– Regulates security exchanges, protects
investors from fraud
continued
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Government Agencies Serving Consumers
• U.S. Department of the Treasury– Collects taxes, pays nation’s bills,
regulates banks, investigates financial crimes
• Federal Communications Commission (FCC) – Regulates communications by
telephone, television, radio, cable, wire, and satellite
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Central Ideas of the Chapter
• The goal of government economic policies is to create economic stability and prosperity for its citizens.
• Government enacts laws and regulations to ensure fair competition and to protect the public well-being and safety.
• Government agencies at all levels assist and protect consumers by providing information, protection, and services.
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Glossary of Key Terms
• business cycle. A cycle of economic activity with periods called contraction, trough, recovery, and peak.
• collusion. When companies make illegal secret agreements, usually to engage in price fixing or to shut out smaller competitors.
Back
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Glossary of Key Terms
• consumer price index (CPI). A measurement of changes in the prices of selected consumer goods and services.
• deficit spending. When government spends more than it collects in tax revenues and must borrow money.
• depression. An extended period of economic recession.
Back
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Glossary of Key Terms
• Federal Reserve System. The U.S. government system that regulates the nation’s money supply and banking system. It is comprised of the Federal Reserve Board, 12 Federal Reserve Banks, and the Federal Open Market Committee.
Back
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Glossary of Key Terms
• fiscal policy. The government’s taxing and spending decisions.
• gross domestic product (GDP). The value of all goods and services produced by a nation during a specified period.
• inflation. An overall increase in the price of goods and services.
Back
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Glossary of Key Terms
• labor force. Composed of people, age 16 and over, who are employed or looking for and able to work.
• labor union. A group of workers who unite to negotiate with employers over issues such as pay, health care benefits, and working conditions.
Back
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Glossary of Key Terms
• monetary policy. Government actions that change the amount of money in circulation by controlling interest rates and credit terms.
• monopoly. A market situation in which one seller produces the entire output of a given product or service.
• national debt. The total amount the government owes at a given time.
Back
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Glossary of Key Terms
• oligopoly. A market situation in which a few large companies dominate an industry.
• perfect competition. A market structure in which competition between producers results in greater innovation, better service, lower prices, and efficient allocation of resources.
Back
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Glossary of Key Terms
• recession. An extended period of slow or no economic growth.
• stagflation. A period of slow growth and high inflation.
• tax. A fee imposed by a government on income, products, or activities, and paid by citizens and businesses.
Back
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Glossary of Key Terms
• underemployment. Workers who are employed only part time or who are “over qualified” for their jobs.
• unemployment rate. The percentage of the labor force that is out of work and seeking employment.
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