The Government and the Economy Unit 5 The Government and the Economy

Economic goals of the government 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

Economic goals of the government 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

Economic goals of the government 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 ÷ ⁼

Government Actions 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

Government Actions Fiscal Policy Revenue = government income Usually through TAXES – payment that governments collect from individuals and businesses

Government Actions 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

Government Actions 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

Government Actions 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

Government Actions 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

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

Government Actions Fiscal Policy Spending Discretionary Spending – programs that the government is free to spend money on or NOT to spend money on Military Education

Government Actions Fiscal Policy Spending

Government Actions 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

Government Actions 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

Government Actions 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

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

The FED 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 FED 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 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

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

The FED 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

The FED 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

The FED 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

The FED Influencing the Economy Tight Money Policy Similar effects to contractionary fiscal policy Helps to To slow the economy To fight inflation