Economics Ch. 8

Economics – The study of how people make, exchange and use goods and services most people have limited resources to meet their unlimited wants Economists call this the problem of scarcity As a result, all societies must answer 3 basic questions: 1.What should be produced? 2.How should it be produced? 3.Who should get what is produced? Four Economic Systems 1.Traditional Economy – the basic economic questions are answered by custom and tradition; farming and goods are produced the same way their ancestor did (e.g. European Feudalism) 2.Command Economy (Planned Economy) – the government or ruler decides the answer to the three basic economic questions Have proven successful but at the cost of individual freedoms Most societies have no private property and everything belongs to the government (e.g. The Soviet Union)

3. Market Economy – individuals enjoy the freedom of making their own economic decisions * individuals may own their own business and sell goods or services to make a profit * government interference is limited to rules or the role of referee * the 3 basic questions are answered by interplay between the producers and the consumers (e.g. the United States) 4 Mixed Economy – a mixture of all three economic systems Overtime, the role of the federal government in the U.S. has changed dramatically At one time, the government held a laissez-faire attitude (stay out) At the turn of the 20 th century during the Progressive Era, the government became a referee to ensure fair competition between businesses During the Great Depression, the government assumed a very active role in the economy IN 1946, the government passed the Full Employment Act setting new goals for the national economic policy The government has primarily three responsibilities 1.Promote maximum employment 2.Promote maximum production 3.Limit inflation (rising prices)

Instruments of Government Economic Policy The Power to Provide Public Goods the government provides some goods to the economy directly such as military goods Redistribution of Income Federal income tax is graduated – wealthier taxpayers pay taxes at a higher rate The government is able to redistribute some income to fund programs for less fortunate citizens The Power to Regulate Economic Activities The government makes sure the market place is fair and just Legislation has been passed to prevent monopolies (e.g. Sherman Antitrust Act) and take steps to protect consumers from impure and unsafe goods The government also protects workers from poor working conditions as well as protecting the environment Fiscal Policy Fiscal policy – the federal government influencing the economy through its spending, taxing, and borrowing Citizens pay money to the government on the federal, state and local levels known as taxes The government also collects money by issuing bonds which the government pays a fixed interest rate back to the person who bought them

Fiscal Policy cont. During a economic downturn, the government will spend more money than it collects, create more jobs and stimulate production On the other hand, if there is high inflation, the government may increase taxes and increase the interest rate in order to slow the economy down and lower prices. Monetary Policy – refers to the government’s ability to control the total money supply in our economy The Federal Reserve System – established in 1913 to help control the nation’s money supply This agency of the government controls the ability of banks to lend money to the public The “Fed” also sets the reserve requirement – the percentage of deposits that banks can lend and the percentage they must keep in reserve (their vaults) In a depression, the Fed lowers the interest rate to allow banks to loan more money to the public, thus stimulating the economy When the economy is expanding to rapidly, the Fed raises the interest rate to discourage banks from loaning out money and people from borrowing money

Trade Policy – The government also regulates trade between the U.S. and other countries Tariffs – taxes on imported goods; used to raise revenue for the government Tariffs are used to protect American goods from cheaper foreign products Quotas – restrictions on the number of goods that a particular foreign country can import into the United States Blockades or embargos – a complete prohibition of trade with another country (e.g. the U.S and Cuba) Protectionism – the use of tariffs, blockades and other policies to protect U.S. producers from foreign competition