Slide 1 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Essential Question What role should government play in a free market economy?

Slide 2 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Objectives 1.Explain why the government tracks and seeks to influence business cycles. 2.Describe how the government promotes economic strength. 3.Analyze the factors that increase productivity.

Slide 3 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Key Terms macroeconomics: the study of economic behavior and decision-making in a nation’s economy microeconomics: the study of the economic behavior and decision-making in small units, such as households and firms gross domestic product (GDP): the total income (value) of all final goods and services produced in a country in a given year. GDP per capita measures income per person

Slide 4 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Key Terms, cont. business cycle: a period of macroeconomic expansion, or growth, followed by one of contraction, or decline recession: two or more consecutive quarters (three months) of economic decline in GDP growth patent: a government license that gives the inventor of a new product the exclusive right to produce and sell it copyright: a government license that grants an author exclusive rights to publish and sell creative works

Slide 5 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Introduction How does the U.S. government encourage growth and stability? –The U.S. government encourages growth and stability by: Tracking business cycles Promoting a high employment rate Keeping prices stable Encouraging the development of new technologies Maintaining a strong US Dollar Promoting US Exports and Free Trade around the world

Slide 6 Copyright © Pearson Education, Inc.Chapter 3, Section 2 GDP and the Business Cycle One measure of the nation’s economic well- being is gross domestic product (GDP). The US government tracks probably the most economic data of any nation (and it is reliable) Doesn’t say anything about the spread of income (level of inequality)

Slide 7 Copyright © Pearson Education, Inc.Chapter 3, Section 2 GDP and the Business Cycle During a period of growth, GDP goes up and in a period of contraction, GDP goes down. This pattern of a period of expansion followed by a period of contraction is called a business cycle. –Changes in the business cycle take place because individuals and businesses, acting in their own self-interest, make decisions about factors such as prices, production, and consumption. So, people get hired and fired, spend more or less and invest more or less. –Government tried to manage as smooth a business cycle as possible –This is one reason we need safety nets (more on this next section) Extreme periods of contraction are called recessions (or potentially a depression)

Slide 8 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Employment and Growth Employment –The government strives to make sure there are enough jobs for everyone who is able to work. –An unemployment rate between 4 percent and 6 percent is considered healthy. –Our current unemployment rate is above 9%. –BLS release unemployment data the first Friday of every month (it’s a very important data point) Economic Growth –To help spur economic growth, the government can cut taxes or increase spending. Republicans tend to favor less taxes and Democrats more spending. It it is not as simple as politicians make it sound –Infrastructure, education and research and development (technology) spending lead to the most innovation and growth

Slide 9 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Economic Stability and Security: Prices One indicator of economic stability is the general level of prices. The government wants stable prices for the economy –Households and firms want to expect stable prices (more on this later) The Federal Reserve attempts to control prices (inflation) –Though funded by taxpayers, the Federal Reserve is technically independent from the government (more on this later)

Slide 10 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Economic Stability and Security: Financial Institutions Other indicators of stability are financial institutions such as banks and the stock market. –Regulations try to keep these institutions stable (SEC, FDIC, Federal Reserve) –Government also protects these institutions as “too big to fail” – mega- controversial The bailouts of the banks and financial institutions in Many taxpayers don’t view government as spending equally on its voters (Occupy Wall Street/Chicago)

Slide 11 Copyright © Pearson Education, Inc.Chapter 3, Section 2 Technology and Government The government promotes innovation and invention to help maintain the country’s technological advantage by: –Funding research and development projects at universities –Establishing their own research institutions, like NASA, Department of Defense (DARPA) –Granting patents and copyrights, which are an incentive to innovation (regulation of private sector; promotes economic security; intellectual property in law)