1. The Government and the Economy
Unit 5
The Government and the Economy

2. 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

3. 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

4. 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 ÷ ⁼

5. 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

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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. Government Actions
Fiscal Policy
Spending

14. 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

15. 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

16. 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

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

18. 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

19. 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

20. 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

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

22. 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

23. 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

24. 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

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