The Government and the Economy

 To increase the STANDARD OF LIVING  Standard of living – ▪ A measure of how prosperous the people of a nation are ▪ The degree of economic comfort available to the people High income Upper-middle income Lower-middle income Low income

 Measuring a nation’s economy  Gross Domestic Product ▪ The dollar VALUE of all goods and services ▪ that are sold TO CUSTOMERS ▪ which are produced WITHIN A COUNTRY’S BORDERS ▪ in ONE YEAR

 Measuring a nation’s economy  Per Capita Gross Domestic Product ▪ The GDP of a country ▪ Divided by the population of that country ÷ ⁼ Per Capita GDP

 Fiscal Policy  The use of the government’s budget to influence the economy ▪ Revenue is the money taken in by the government ▪ Spending is the money paid out by the government

 Fiscal Policy  Revenue = government income ▪ Usually through TAXES – payment that governments collect from individuals and businesses

 Fiscal Policy  Types of Taxes ▪ Progressive ▪ The poor pay a lower rate ▪ The rich pay a higher rate ▪ Theory: help the poor to make ends meet

 Fiscal Policy  Types of Taxes ▪ Proportional ▪ The poor pay a flat rate ▪ The rich pay the same flat rate ▪ Theory: everyone should pay the same rate, equality

 Fiscal Policy  Types of Taxes ▪ Proportional ▪ The “catch” ▪ Disposable Income = the money left-over after buying the necessities ▪ Rich people have a LOT more “Disposable Income” ▪ So the same (flat) rate doesn’t have the same impact on the rich that it has on the poor

 Fiscal Policy  Types of Taxes ▪ Regressive ▪ The poor pay a higher rate ▪ The rich pay a lower rate ▪ Theory: the rich will invest extra money; businesses will grow and more jobs will be created for the poor

 Fiscal Policy  Spending ▪ Mandatory Spending – what the government MUST spend money on every year; it’s the law! ▪ Social Security ▪ Medicare

 Fiscal Policy  Spending ▪ Discretionary Spending – programs that the government is free to spend money on or NOT to spend money on ▪ Military ▪ Education

 Fiscal Policy  Spending

 Fiscal Policy  Expansionary Policy ▪ Government increases (expands) the amount of money in peoples’ hands ▪ Tax cuts to the people. ▪ Increased spending causing businesses to  Hire more workers  Increase wages  Increase hours

 Fiscal Policy  Expansionary Policy ▪ Government increases (expands) the amount of money in peoples’ hands ▪ Why?  To jumpstart the economy  To increase employment  To fight a recession

 Fiscal Policy  Contractionary Policy ▪ Government decreases (contracts) the amount of money in peoples’ hands ▪ Tax increases to the people. ▪ Decreased spending causing businesses to  Cut workers  Cut wages  Cut hours

 Fiscal Policy  Contractionary Policy ▪ Government decreases (contracts) the amount of money in peoples’ hands ▪ Why?  To slow the economy  To fight inflation

 The Federal Reserve – what is it?  It’s the banks’ bank ▪ It regulates local banks ▪ It influences how they lend money to people and businesses  It’s the bank of the USA ▪ It manages the nation’s money ▪ Helps to influence the economy

 The Federal Reserve – how is it organized?  The Board of Governors ▪ 7 Governors ▪ Appointed by the President of the USA ▪ Confirmed by the Senate of the USA ▪ Meet in Washington D.C. ▪ Chairman (Chair) of the Board ▪ Appointed by the President ▪ Confirmed by the Senate ▪ Oversees the actions of the FED

 The Federal Reserve – how is it organized?  The Reserve Banks ▪ 12 regions ▪ Oversee activities of the district banks within their regions  District Banks ▪ Look out for economic interests of the local area

 Influencing the Economy  MONETARY policy – how much money is available to the public at any one time ▪ Banking policies ▪ NOT printing money!

 Influencing the Economy  Easy Money Policy ▪ Increase the amount of money in people’s hands ▪ Reduce the amount of funds a regular bank must hold in reserve ▪ Increases the amount of money the bank can lend to people and businesses ▪ Lower the FED interest rate ▪ REGULAR banks can borrow more money from the FED ▪ Banks can lend more money to people and businesses

 Influencing the Economy  Easy Money Policy ▪ Similar effects to expansionary fiscal policy ▪ Helps to  To jumpstart the economy  To increase employment  To fight a recession

 Influencing the Economy  Tight Money Policy ▪ Decrease the amount of money in people’s hands ▪ Increase the amount of funds a regular bank must hold in reserve ▪ Decreases the amount of money the bank can lend to people and businesses ▪ Raise the FED interest rate ▪ REGULAR banks borrow less money from the FED ▪ Banks lend less money to people and businesses

 Influencing the Economy  Tight Money Policy ▪ Similar effects to contractionary fiscal policy ▪ Helps to  To slow the economy  To fight inflation