Ch. 23 Government & the Economy

Standard EE

How does the Govt help the needy???• What is:

•WIC•Welfare•Unemployment•Social Security Income

The Government’s Role• In a free enterprise, capitalist system the government practices laissez-

faire economic policy, exercising minimal control over the economy• The government has 4 major roles in such a market economy

• Providing Public Goods• Dealing with Externalities• Maintaining Competition• Regulating Market Activities

Providing Public Goods

• Things that are too large, complicated, & costly to be done by private business or individuals• police force, fire department, military defense, roads

Dealing with Externalities

• Unintended consequences of economic decisions • Positive: good roads make products cheaper • Negative: pollution from companies could damage air and water

Maintaining Competition

• Anti-trust laws prevent the development of monopolies that can ruin the market system • Exemption: natural monopolies where it is cheaper & more efficient to have

one company provide the service• Power company, water service, etc.

Regulating Market Activities• Insure that businesses follow the law• Advertising laws to protect against false claims• Product labels to alert consumers what they are getting• Product safety requirements to insure the health/safety of consumers

Too Far?

Measuring Economic Growth• Gross Domestic Product (GDP): dollar value of all finished goods

produced by a country in a year• Allows comparison from year to year to determine economic growth• Allows comparison from country to country to compare economies

The Business Cycle• Helps economists map the Business Cycle • Pattern of expansion and recession as the economy grows over time

• Expansion – economic growth• Recession – 6 months of negative GDP growth (contraction)• Can result in high unemployment as businesses cut costs by laying-off workers• Extreme recession lasting for long period - Depression

Fiscal Policy• Fiscal = Budget• Fiscal Policy - Government use of taxing & spending to affect

economic growth (try to extend expansionary periods)

How Fiscal Policy Works• Government cuts taxes to increase economic growth• People pay less taxes = they have more money• Spending increases and companies have to expand to meet new demand• Hire new workers, which increases money in the economy (from new

paychecks)

How Fiscal Policy Works

• The government can bring about similar results by increasing spending• Companies hire new workers to complete government projects• New paychecks increase money in the economy, increasing demand

Problems with Fiscal Policy

• One danger of expansionary Fiscal Policy: Inflation – general rise in prices• Always happens, but too fast will affect consumer buying power & lead top

economic contraction