Governments wish to promote economic growth low inflation full employment and a positive balance of trade Economic Growth is crucial because a growing economy suggests expanding opportunities for people and businesses which is more desirable than a stagnant or declining economy Economic Growth the increase in the market value of the goods and services produced by an economy Attributed to an increase in productivity new physical and human resources It is measured by the percent rate of increase in growth domestic product adjusted for inflation real DP Recession Negative growth rate the decrease Sustainable economic growth is economic development that attempts to satisfy the needs of humans but in a manner that sustains natural resources and the environment for future generations While growth is good when it is too much and too quickly it can be suboptimal This occurs due to new resources or new access Inflation the purchasing power of money It occurs when there too few good and services available in the market making the prices rise Low inflation is desirable because inflation affects the price producers must pay to produce goods and services and also affects the price consumers pay for goods and services High things are expensive low things are cheap Employment Rate Ratio that measures the proportion of the country s working age population that is employed Heavily dependent on economic growth When in growth jobs open When in recession jobs close 0 is desirable but unattainable People are always changing jobs 4 5 is considered full employment Balance of Trade is the difference between a country s imports and its exports A positive balance of trade is politically desired because the average citizen believes it is better to be a net exporter and import smaller portion of what they consume Nations that are net importers are less independent than nations that import loss o More exports job availability Economy and Gov t National leaders particularly the President live and die by the economy In times of low inflation growth low unemployment and positive trade balances approval rates are high as are re election rates As these decrease turnover is high The Gov t is blamed for the economy but there is little they can do to control economic outcomes Domestic and world economies are influences by processes that are largely random and for the greatest part beyond the control of gov t leaders But without gov t there can t be a functioning economy the political market involves the exchange of taxes for a distribution of benefits where the primary benefits are order and establishing property rights With these benefits in place economic production increases Approaches to managing the Economy I Classical Model holds that supply and demand are natural regulatory tools thus the economic regulates itself This describes as the laissez faire model of economics There should be no gov t interference or anyone else in the regulation of an individual s affairs Significant macroeconomic problems high unemployment high inflation results from changes in technology and or gov t interference This model has problems it is not possible to have a large market economy w o gov t interference property rights In economic recession people want austerity policies that reduce a gov ts budget deficit expenditures exceed o Austerity revenue o As economy worsens tax revenue decreases o With lower revenue decrease government spending o Don t go farther into debt when you have no income o When the economy recovers spending can increase II Keynesian Economic Model Keynes s solution was to conceive of aggregate demand as the product of consumption government spending and investment and to arge that when demand lagged because of lags in those elements it is appropriate for the gov t to use deficit spending Encourages deficit spending Government spending as a means by which to curb recessions especially in the creation of public sector jobs NEW DEAL Argues that austerity increases the burden on citizens and prolongs recessions Tools for Managing the Economy I Fiscal Policy involves taxing and spending decisions Tax redistribution reduces income inequality and contributes to economic growth Progressive taxation involves the wealthier members of society paying a higher portion of their incomes as taxes Flat tax proportional all earners pay the same Regressive taxation when poor persons pay a larger share of their income Ex sales tax alcohol tax Done by president and congress In the US tax rates are complicated by a series of tax deductions that are used as incentives for certain types of behavior II Monetary Policy Involves managing the supply of money It is done by the Federal Reserve Board o Chairperson Selected by President approved by Senate 6 other members selected by President approved by Senate Focuses on discount rates the minimum interest rate Lower discount rates to banks translate into lower interest rates for consumers When interest rates are low money is inexpensive to borrow it is more likely that companies will expand facilities people will build houses etc More expensive interest rates constrain economic activity III Regulation involves government intervention in the decisions that firms make or in market outcomes The economic rationale for most regulatory interventions is market failure Economic regulation involves oversight of costs and of investment decisions The government uses various tools to regulate i Price setting involves an outside source to establish a price ceiling on an industry with limited competition A good can only cost X amount ii Entry Restrictions ex franchises certificates of need and license fees things needed to do something This creates a barrier to entry it is the barriers put forth by the government to open a shop become a barber etc Service Obligations Minimum standards of operations for firms Oversight Decisions that firms make are subject to government scrutiny Regulation is often subject to criticism b c it is viewed as a hindrance to economic growth Investors support certain politicians so that those politicians can make it easier for those investors to open businesses Laffer Curve A curve showing the optimal relationship between taxation and economic activity Tax cuts can lead to an increase in tax collections That is moving from a tax rate of 0 to some value t leads to an increase in government revenue but beyond t government revenue decreases Essentially the effect of lower
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