MR. LIPMAN’S AP
GOVERNMENT
POWERPOINT CHAPTER 18
The Government and Economic Policy
WHAT SHOULD GOVERNMENTS
ROLE IN THE ECONOMY BE?
• Business Cycles
• Laissez-Faire
• Adam Smith and the Invisible Hand
Theory of the Marketplace
• John Maynard Keynes and the Theory of
Deficit Spending
• Ronald Reagan and the Theory of
Deregulation
Question: Keynesian economic contends that:
• the market works best when left to the invisible
hand
• government spending is necessary to reduce
the deficit
• governments work best when they work the
least
• government intervention is always an obstacle
to efficiently functioning economies.
• government intervention is often necessary to
resolve the inefficiencies of the private sector.
Question: Keynesian economic contends that:
• the market works best when left to the invisible
hand
• government spending is necessary to reduce
the deficit
• governments work best when they work the
least
• government intervention is always an obstacle
to efficiently functioning economies.
• government intervention is often necessary
to resolve the inefficiencies of the private
sector.
During which era did the U.S. government first
adopt interventionist policies?
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•
•
•
•
the 19th century
the Progressive era
the Great Depression and the New Deal
the 1960s
the 1980s
During which era did the U.S. government first
adopt interventionist policies?
•
•
•
•
•
the 19th century
the Progressive era
the Great Depression and the New Deal
the 1960s
the 1980s
FDR CHANGES EVERYTHING
• The Depression of the 1930s required
drastic action and the following was done:
1. Glass-Steagall Act (FDIC)
2. SEC
3. AAA
4. Wagner Act (collective bargaining and right to
organize)
THE NEW DEAL MEANS THAT GOVERNMENT
WOULD NOW BE PRIMARY SOURCE OF
ECONOMIC SOLUTIONS INSTEAD OF THE
MARKETPLACE
• Economic Regulation is government
regulation of business practices
• Social Regulation is government
regulation of safety of products and
conditions of production
• Four Reasons for surge of these
regulations:
– 1. 1960s/70s increase in activism
– 2. More public awareness of dangers and
safety
– 3. Congress wants visibility and prominence
– 4. Presidents support them
BUT IN THE 1980S A REVERSE TREND WILL
TAKE PLACE (Deregulation)
Income Security Programs Today
• Many income security programs are
entitlement programs
• Non-means-tested programs
– Social security
– Unemployment insurance
• Means-tested programs
– Supplemental security income (SSI)
– TANF and SNAP
– Earned Income tax credit program
How many Americans benefit from
income security programs?
Which of the following is a non-means-tested
program?
•
•
•
•
•
TANF
SSI
SNAP
unemployment insurance
earned income tax credit program
Which of the following is a non-means-tested
program?
•
•
•
•
•
TANF
SSI
SNAP
unemployment insurance
earned income tax credit program
Fiscal Policy in a Global Context
• Globalization and
income
– minimum wage v.
wages abroad
• Increasing
interdependence
– 2008 economic
crisis spread swiftly
abroad
THE BUSINESS CYCLES
•
•
•
•
Growth (economic stability)
Inflation
Recession
Depression
– THE TOOLS USED TO COMBAT OR ASSIST
THESE ARE:
• MONETARY POLICY (Federal Reserve Bank)
• FISCAL POLICY (Executive Branch)
Monetary and Fiscal Policy
• Gross Domestic Production (GDP) is the
total market value of all goods and
services produced in one year in a country
– (a negative GDP is an indication of no
economic growth)
• Revenue is how much the government has
taken in
• Expenditures is how much the government
has spent
How does the federal government
raise and spend money?
MONETARY POLICY
• The Federal Reserve System
– 12 Regional Banks (private but leaders
appointed by government and stock owned by
large commercial banks) ---These are the
bankers bank
– Establish monetary policy by:
1. Setting Reserve Requirements for Banks;
2. Controlling the Discount and FOMC rates
for lending;
3. Open Market Operations (buying and
selling of government securities-bonds)
4. Controlling supply of money (paper)
existing
Question: The discount rate is?
• the rate at which discounts are given to Federal
Reserve member banks when purchasing goods
and services.
• the interest rate at which the Federal Reserve
lends money to member banks.
• the discount given to citizens on welfare when they
purchase goods and services.
• the normal discount given to U.S. banks over
foreign banks when borrowing money from the
Federal Reserve
• the reserve requirements for Federal Reserve
member banks.
Question: The discount rate is
• the rate at which discounts are given to Federal
Reserve member banks when purchasing goods
and services.
• the interest rate at which the Federal Reserve
lends money to member banks.
• the discount given to citizens on welfare when they
purchase goods and services.
• the normal discount given to U.S. banks over
foreign banks when borrowing money from the
Federal Reserve
• the reserve requirements for Federal Reserve
member banks.
Seeking to Repair the Economy in 2009
Where did the economic stimulus funds go?
Question: The purpose of TARP was to:
• stimulate the economy.
• reduce the federal debt.
• help families unable to make their
mortgage payments.
• buy “clunker” cars to trade for newer,
more fuel efficient cars.
• set limits on CEO pay
Question: The purpose of TARP was to:
• stimulate the economy.
• reduce the federal debt.
• help families unable to make their
mortgage payments.
• buy “clunker” cars to trade for newer,
more fuel efficient cars.
• set limits on CEO pay
The Key Players in Fiscal Policy
• OMB= Office of Management and Budget
works for the executive branch
• CBO= Congressional Budget Office works
for legislative branch
• Entitlement Spending has grown at a
much faster pace than discretionary
spending
• Balanced Budget- Probably will no longer
see it in your lifetime
Who holds U.S. debt as of 2010?
ENVIRONMENTAL REGULATION
• Used to be controlled by states but now
controlled by Federal Government
• Change began with creation of EPA in
1970 and the power of this agency has
grown so large that it now is directly
involved in almost all matters of potential
governmental spending for construction or
production