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The Role of Government in the Economy

Part I

How does the United States government promote & regulate marketplace competition? Enforcing antitrust legislation to discourage the formation of monopolies - one business is not allowed to control an industry… If it did, it would have no reason to benefit the consumer. So the government will disband (break-up) a monopoly.

EX: There cannot be only one oil company or they could raise the price too high for consumers to benefit. All of the electric companies cannot merge into one & charge a really high price… Etc…

How does the United States government promote & regulate marketplace competition? Engaging in trade with the global economy - worldwide markets in which the buying & selling of goods & services by all nations takes place Review: VA & the USA specialize in certain products & services, so we must trade to: Obtain goods & services that they cannot produce themselves Buy goods & services at a lower cost/opportunity cost Sell goods & services to other countries for profit Create jobs

How does the United States government promote & regulate marketplace competition? Supporting business start-ups by giving tax breaks & money (grants) to help businesses develop

Government agencies that regulate business include the following: FCC (Federal Communications Commission) - regulates the radio / tv / media industries EPA ( Environmental Protection Agency) – regulates pollution & environment laws FTC ( Federal Trade Commission) – prevents unfair methods of competition against consumers FDIC (Federal Deposit Insurance Corporation) – although it’s not a part of the government, the FDIC works along side of the gov’t to insure money in the banks against bank failures & regulates the banking industry

Other ways the United States government protects consumer rights & property rights All individuals have the right of private ownership, which is protected by negotiated contracts that are enforceable by law -- A contract includes an offer (what is given or done) & acceptance (agreement that you want the offer), & is signed by both parties.

Other ways the United States government protects consumer rights & property rights Consumers may take legal action against violations of consumer rights – E.g., sue for broken contracts. Government agencies establish guidelines that protect public health & safety – E.g. EPA, FDIC, FTC, & the Dept. of Homeland Security.

Generalizations The government promotes & regulates competition in the marketplace, as well as passes laws & creates agencies to protect consumer rights & property rights.

Part II

What types of goods & services do governments provide to the people & how do governments pay for the goods & services they provide? Public Goods & Services: Characteristics of most goods & services provided by government are: Provide benefits to many at once – they cannot be denied to anyone.

What types of goods & services do governments provide to the people & how do governments pay for the goods & services they provide? Would not be available if individuals had to provide them Include: interstate highways, schools, postal service, police & fire stations, & national defense Governments pay for public goods & services with tax revenue, borrowed funds, & through fees ( e.g., park entrance fees)

Generalization Government provides certain goods & services that individuals & businesses acting alone cannot provide efficiently.

Part III

How does the government influence economic activity & what role does the 16 th Amendment play in taxation? Ways the government influence economic activity: taxing, borrowing, & spending

The 16th Amendment to the Constitution authorizes (permits) Congress to tax personal & business incomes, or money earned.

Generalization The way that the government taxes, borrows, & spends to influence economic activity.

Taxing Government tax decreases Increases funds for private & business spending Government tax increases Decreases funds available for spending

Government borrowing Reduces funds available for borrowing by individuals & businesses Increased government borrowing Decreased government borrowing Increases funds available for borrowing by individuals & businesses for borrowing by individuals & businesses

Government Spending

Part IV

What is the role of the Federal Reserve System in the US Economy? Federal Reserve System / Bank (“The Fed”)- the central bank of the United States, which has the duty of watching over the US Economy. The Fed has the following roles…

What is the role of the Federal Reserve System in the US Economy? – maintain the value of the national currency (dollar) – regulates banks to ensure the soundness of the banking system & the safety of deposits – manages the amount of money in the economy to try to keep inflation low & stable – acts as the federal government’s bank.

The Business / Economic Cycle - the economy naturally moves up & down like the prices of goods. Its pattern is called the business cycle Depression

– When the economy is improving (high employment, low government spending, lower taxes) it goes through a period of expansion & continues to grow until it reaches a peak. – After the economy peaks, it naturally begins to go down (low employment, high taxes & government spending) & goes through a period of recession. It continues to decrease until it hits a low point called a depression.

Ways the Government / Fed Can Influence the Economy: The government can influence the economy’s position on the business cycle by issuing currency & regulating the amount of money in circulation. This job is controlled by the Federal Reserve Bank (The Fed). The role of the Fed is maintaining a stable economy The Fed acts as a banker’s bank by controlling how much money banks have to use & by confirming deposits & debits to accounts.

Ways the Government / Fed Can Influence the Economy: Printing more money does not make the dollar stay strong – in fact it does the opposite. The more money in circulation, the lower the value of the dollar becomes. As a result consumers can not buy as many goods because of inflation, or the increase in the cost of goods & services.

Generalizations – Not in Notes To slow down the economy (to keep from peaking and going into recession) 1. Increase the reserve requirement 2. Raise the discount rate 3 Sells government securities To stimulate the economy – (to keep from going into Depression) 1. Lower the reserve requirement 2. Lower the interest rate 3 Purchase government securities

Why does the government issue currency & which government agencies are responsible for creating it? Money - is defined as anything that is generally accepted as a method of payment. When the United States government issues coins & currency, people accept it in exchange for goods & services because they have confidence in the government to back up the money. Only the US Government issues money as a means to facilitate this exchange.

Why does the government issue currency & which government agencies are responsible for creating it? The three types of money generally used in the US are:  Federal Reserve notes (currency or paper $$)  Change (Coins)  Checks & debit cards