Economic System Comparisons

Market Economy  Economic decisions are made by individuals and are based on exchange or trade. The choices made by individuals determine what gets made and how, as well as who consumes the goods and services produced.

Command Economy  (Centrally Planned Economy) The central government alone decides how to answer all key economic questions. The government makes all decisions on the production and consumption of goods and services.  Example: Former Soviet Union

Traditional Economy  Economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services. There is little room for innovation or change, it revolves around the family.

Mixed Economy  Market based economic system with limited government involvement.  A mix between Socialism and Capitalism. It is a hodgepodge of freedoms and regulations, constantly changing because of the lack of principles involved.

Economic Philosophies

Capitalism A. Adam Smith: Wealth of Nations i. Laissez Faire: “hands off” ii. Invisible Hand: The economy will regulate itself

B. Karl Marx: Communist Manifesto & Das Kapital i. Struggle between workers and owners ii. Workers add value to goods but do not receive the profits  against market economies Socialism & Communism

Socialism  A social and political philosophy associated with centrally planned economies. It is based on the belief that democratic means should be used to distribute wealth evenly throughout a society. Political and social equality.

Communism  a political system that arose out of the philosophy of socialism. It is characterized by a centrally planned economy with all economic and political power resting the in the hands of the central government.  It enslaves the entire population, and rules through fear. Because it destroys property rights, it makes the production of wealth almost impossible.property rights

Fascism A system of government marked by centralization of authority under a dictator, strict socio-economic controls, suppression of the opposition through terror and censorship, and typically a policy of aggressive nationalism and racism.  Oppressive, dictatorial control

Keynesian Theory  Aggressive Fiscal Policy Cut Taxes while increasing government spending. This will increase deficit spending  Gov’t spending more than it is taking in

Monetary & Fiscal Policy

Federal Reserve Bank Central Bank for U.S 12 district banks Regulates the banking industry Tracks and manages the national monetary supply Issues paper currency Clears personal checks Banks earn a profit on money deposited  Bank lends part of deposited money and charges interest

Characteristics of money  Durability = withstand wear and tear  Portability  Divisibility  Uniformity = count and measure accurately  Limited Supply  Acceptability

Fiscal Policy  U.S. has an operating budget of about $1.7 – 2 Trillion  Federal Budget  Document indicating the amount govt. expects to receive and spend in a year  Fiscal year = Oct. 1 to Sept. 30  Office of Management and Budget (OMB) = prepares the federal budget

Expansionary Fiscal Policy  Increase Output  Tax Cuts  Encourage economy to expand  Individuals have more money to spend  Businesses keep more profits  Increase demand, prices and output

Contraction Fiscal Policy Purpose is to decrease output Raise taxes Individuals have less money Firms keep less of profit Decrease in spending, labor and capital Slows GDP

Monetary Policy Monetary Policy: How much it restricts or releases the flow of money into the economy Interest Rate: a % that determines how much money one must pay a lender in exchange for a loan (Good credit = better interest rates)

Federal Deposit Insurance Commission  Also know as FDIC  Came after the Great Depression when many banks had to close after masses withdrew their money  FDIC helps prevent mass withdrawals by assuring depositors that their money is insured by the government up to a certain amount  They have to keep a certain amount of money on hand in their bank. This is called the reserve requirement.

Credit  Debit card:  card that looks like a credit card  serves the same function as writing a check  convenient way to access $  Credit card: loans  paying interest on purchases at a later date  (usually 30 days)  Time deposits/Certificates of Deposits:  putting money in an account for a certain amount of time and cannot withdraw it for that amount of time  while getting interest off of it while bank holds onto it.

Policies  Loose Money Policy:  Low reserve requirement  increases $ supply, because more people can borrow and spend $.  Tight Money Policy:  High reserve requirement  limits the money supply