1. Government and the Economy Role of Government Money and Banking The Federal Reserve Government Finance

3. Role The Role of Government Private businesses create private goods- goods that can be used by only 1 person (shoes, clothes) The Gov’t creates public goods- goods that can be used more than once by many (parks, roads) Gov’t knows that providing these public goods is positive for entire society  externality Gov’t makes sure monopolies do not form- a monopoly forms when there is NO competition for a good/service Antitrust laws are laws to control monopoly power and promote competition Gov’t worries when mergers occur  when 2 or more companies join together to form a single company

5. Role Regulating the Market 1. Natural Monopolies- sometimes it makes more sense to only have 1 company make a product  gov’t must regulate that company, however 2. Advertising and Product Labels- truth in advertising 3. Product Safety- gov’t in charge of recalls on faulty products

6. Role Measuring the Economy 1. GDP measures economic growth  total amount of goods/services produced in a year –Real GDP reflects growth of the economy after inflation has been taken into account –Economy does not remain steady at all times  The Business Cycle Economy can expand- real GDP goes up (~10 yrs) Recession- real GDP goes down

9. Role 2. Unemployment measures economic growth- High UR= bad economy –When UR is high, government uses fiscal policy  changes in gov’t spending to offset UR 3. Inflation is a measure of the economy  when prices gradually increase, while income remains the same  reduces purchasing power of consumer

12. Role 5. Stocks and the Stock Market measure the economy –Stock is a portion of a company you can buy –Stock prices change based on supply and demand –Stocks are bought and sold at a stock exchange –We measure the economy based on an average of the stock prices of about 500 companies

13. Money and Banking Money has 3 functions: –Medium of exchange –Store of Value –Measure of Value Money is anything that people are willing to exchange for goods- Coins and Currency are the most popular Money is valuable because we are positive others will find it valuable too

14. Money and Banking The Financial System Ppl. take their money to banks and banks use that money to lend to other ppl/bus. Several types of banks –Commercial banks- offer financial services to individuals and businesses –Savings and loan associations- typically loan money to ppl. to buy homes –Credit Union- banks that operate for a particular business or group

16. Money and Banking How Banks Operate Banks are businesses- they are started by investors Banks need ppl to make deposits into checking accounts and savings accounts Sometimes customers loan the bank some money for a limited time and then get their money back, plus interest  certificate of deposit Banks are in charge of making loans  money in circulation actually grows

17. Money and Banking Changes In Banking First bank of US was owned by Federal Gov’t  1791 Some states made their own banks and issued their own currency 1863- The National Banking Act created a national currency and combined state and federal banks The Federal Reserve was created by the gov’t to be the bank’s bank Federal Deposit Insurance Corporation (FDIC) promises to insure consumer’s money from crisis  Great Depression

20. Federal Reserve The Federal Reserve System This is the central bank of the US  when banks need money they come to the Fed 12 Federal Reserve Banks The Federal Reserve is a gov’t agency and the president selects the chairman The Federal Open Market Committee makes the decisions that affect the economy as a whole by changing the money supply

22. Federal Reserve Functions of the Fed 1. Acting as the Government’s Bank- holds gov’t money, prints money, etc

23. Federal Reserve 2. Conduct Monetary Policy- control supply of money Fed can raise or lower the interest rate (how much its costs to borrow money) Fed can charge member banks more or less for loans  discount rate Fed can raise or lower reserve requirement  amount of money banks are required to keep in the Fed Fed can change money supply through open market operations- buying and selling US bonds

24. Government Finance The Federal Government Congress and President work together to create budget  blueprint of how the gov’t will raise and spend money Gov’t uses Fiscal Year (12 month period)

25. Government Finance The Budget Process –February- P. proposes budget to Congress –Congress passes budget resolution- adds up how much spending and revenues for country Mandatory Spending: spending that does not need annual approval (Social Security) Discretionary Spending: gov’t spending that must be approved each year (defense) Congress passes appropriations bill  law to approve spending

26. Government Finance Revenues and Expenditures –About ½ of revenue comes from income tax, then from payroll tax to pay for Social Security and Medicare

27. Government Finance 3 types of Taxation Progressive: The more you make, the more you pay Regressive: The percentage you pay goes down as you make more money Proportional: Same percentage of taxes regardless of income Gov’t spends most of its money (expenditures) on Social Security  retirement money for elderly  #2 is national defense

29. Government Finance Managing the Economy Gov’t must learn to function with either a surplus or deficit When in debt, gov’t must use deficit spending  borrowing money to pay for bills Gov’t sells bonds (promise to repay loan at a later date, plus interest) to American ppl. to pay for bills The gov’t achieves a balanced budget when spending equals revenue  NC must have a balanced budget

30. Government Finance Impact of national debt –Interest payments-gov’t must pay interest on past debt, causing taxes to increase –Interest rate- when gov’t borrows money, it leaves less for citizens to borrow  interest rates increase

31. Government Finance Fiscal Policy Gov’t stimulates economy by lowering taxes and increase spending Economy has automatic stabilizers to help citizens immediately –Unemployment Benefits –Progressive income tax