The Budget and Economic Polices Chapter Seventeen

Basic Terms GDP: Gross domestic product=the monetary value of all goods and services produced in a nation each year. Inflation: When prices rise, the value of money declines, and people can buy less with what they have. Recession: At least two quarters (6 months) where the GDP declines. Depression: Severe and persistent drop in economic activity

Goals of Economic Policy Economic growth: Annual increase in the GDP=more jobs, more goods and services produced, higher incomes, more profits for companies Control inflation: where your purchasing power declines and the holdings of banks decrease. Trying to slow inflation by increase interest rates may slow growth at the same time. Goals of Economic Policy

Maintain positive balance of payments: the annual difference between payments and receipt between us and our trading partners or exporting more than we import Goals p.2

Maintain budget discipline: small deficits are okay but large ones can hurt our ability to borrow and continue investing Goals p.3

Goals p.4 Avoid negative externalities or the bad effects of economic growth pollution workplace injuries health hazards Unsafe products (such as tainted food, toys with lead, etc.) Ex. Toyota

Tools of Macroeconomic Policy cont… Macroeconomic policy looks at the performance of the economy as a whole or broad areas of the economy, such as employment. Fiscal policy Congress and the president try to alter government finances by raising or lowering government spending, raising or lowering taxes, and raising or lowering government borrowing Difficult to use ex: the bailout, ARRA

Tools of Macroeconomic Policy Government policy to influence interest rates and control the supply of money in circulation Federal Reserve Board Actions by the Fed affect how much money is available to businesses and individuals in banks, savings and loans, and credit unions. It influences interest rates and the money supply. Open market operations Discount rate Reserve requirements

Proper Role of Government in the Economy Keynesians: If the economy is not being used to full capacity, it is the govt’s role to stimulate growth through increasing government spending, tax cuts, etc. Monetarists: the gov. role should be limited to managing the money supply and credit

Proper Role of Government in the Economy cont… Supply-side economic policy: The government should loosen the reins on the free market, cutting taxes, reducing regulations on businesses. New Growth Theory: using government money to stimulate research, innovation, education, labs, science, etc. Not always clear cut between Reps. and Dems

The Deficit and the National Debt The budget deficit is the annual shortfall between what the government spends and what it takes in. The national debt refers to the total of what the government owes. Benefits and dangers of national debt Rise of national debt typically associated with war

The Deficit and the National Debt cont… The budget deficit is the annual shortfall between what the government spends and what it takes in. The national debt refers to the total of what the government owes. Benefits and dangers of national debt Rise of national debt typically associated with war

State governments depend mostly on sales taxes Taxation Federal government depends mostly on income taxes, which are only mildly progressive other federal taxes, such as Social Security, are regressive recent tax cuts for the rich will make the distribution of wealth more unequal State governments depend mostly on sales taxes Local governments depend mostly on property taxes