Public Policy Study Guide Test 2 Readings in the book pp 185 337 Economic Policy and the economy Topic 4 Ch 7 Readings Goals of Economic Policy The major economic goals that government attempts to promote are nonetheless fairly consistent They are economic growth low levels of unemployment low levels of inflation positive balance of trade and management of deficits and debt Economic Growth Economic growth means an increase in the production of goods and services each year and is expressed in terms of rising Gross Domestic Product GDP Such growth means that peoples income on average increase from year to year Many benefits follow from economic growth Strong economy adds to governments tax revenues May make redistributive programs palatable because people are more likely to accept policies that redirect some of their money to others if they have experienced an increase in their own wealth Allows more people to receive or increases benefits from government programs High levels of economic growth could lead to damaging levels of inflation and low levels of growth can lead to a budget deficit Low Levels of Unemployment Low unemployment or full employment has obvious benefits to the economy as well as to individuals Americans have chosen low levels of unemployment as a policy goal Jobs can substitute for social welfare programs Future changes in jobs sectors Unemployment Not distributed evenly EX Age or race Impacts Governments budgets Loss of revenue Increase in expenditures Unemployment not only harms the people without jobs but also has two deleterious effects on the economy and the government s budget First the more people who are unemployed the fewer people who are paying income or social security taxes so that means less revenue is coming into the treasury to pay for government programs Second the unemployed may be eligible for a number of government programs geared toward people with low incomes like Medicaid food stamps or welfare So basically the higher the unemployment the less money coming in and more money Is being paid out to the people that are unemployed Low Levels of Inflation A simple definition of inflation is an increase in the cost of goods and services The Consumer Price Index CPI measures inflation Represents average change in price over time of a variety of goods and services Food housing apparel medical care The CPI overstates inflation by about 1 1 why dose this matter Because many government programs such as social security are tied directly to the CPI as the official measure of inflation Positive Balance of Trade A positive balance of trade is an economic goal related to the role of the United States in an international economy Many argue that the goal should be for the nation to export more than we import witch would be a positive balance of trade Those concerned with the negative balance of trade are often referred to as protectionists they have a number of reasons why the United States should attempt to rectify the situation First they see the negative balance as evidence that US goods are not as competitive as foreign goods Second certain industries are crucial to the nations security and economy well being for example steel is needed for the military for weapons and what not Third are the equality considerations with regard to trade some countries impose tariffs or quotas on US goods that prevent American companies from competing on equal footing Protectionists say that the US should impose similar trade restrictions Theory of Comparative advantage Vs Comparative disadvantage Countries that produce a good particularly well and have the comparative advantage should overproduce that good and export the excess to countries that don t produce the good as well on the same token a country that doesn t produce goods well should import them from somewhere else comparative disadvantage Managing Deficit and Debt National debt consists of an accumulation of all the deficits the nation has run Deficit budget expenditures greater than revenues Debt total accumulation of annual deficits Sources of borrowing private investors and other countries intergovernmental holdings Impacts limiting funds and interest rate payments back to investors and other countries Less money that can go to government programs Interrelationships of Economic Goals When a larger number of people are out of work the demand for products should go down and with a decrease in demand we should see an increase in prices The opposite effect should occur when unemployment is low the more people with money to spend increases the demand and prices go up Another theory is that if the economy is growing too fast the Fed witch is responsible for monetary policy will intervene and attempt to keep inflation in check by raising interest rates With high deficits or debt less money is available for private investment witch limits economic growth and perhaps exacerbates unemployment interrelationship of goals Tools of Economic Policy Fiscal policy is a term that describes taxing and spending tools The primary goal of fiscal policy is the budget process that government goes through every year During this process policymakers decide how much money to spend on each government program For example roads education and national defense The major tools of fiscal policy are tax changes and government expenditures In a recession for example government policy makers would attempt to stimulate economic growth To do this president and congress have two basic choices Cut taxes or increases spending Cutting taxes puts more money in people pockets and in turn helps them to buy more goods and services and stimulates the economy When the economy is running too hot the government can use the opposite tactics to address the situation Raising taxes takes away disposable income making them buy less and controlling the rising inflation The Reagan administration introduced a different form of fiscal policy officials argued that a shortage of investments in the United States was the cause of the sluggish economy and rising deficits And the answer was supply side economics supply side economics states that the government could increase economic growth by cutting taxes especially for the richest individuals This was the case because they could invest in the economy in terms of building or expanding businesses and thus creating more jobs Monetary Policy Monetary Policy is a pivotal component of economic policy in the United States the
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