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Foundations of Personal Finance Ch. 2

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1 Foundations of Personal Finance Ch. 2

2 Foundations of Personal Finance Ch. 2
Government and the Economy 2

3 Foundations of Personal Finance Ch. 2
Chapter Objectives Diagram and explain the four parts of the business cycle. Compare and contrast recession, inflation, and stagflation. Describe how the government uses fiscal and monetary policy to combat inflation and recession. Explain the economic consequences of government taxing and spending. continued

4 Chapter Objectives Explain how the national debt hurts the economy.
Describe the government’s role in promoting competition. Identify the laws and government agencies that protect consumer interests.

5 Economic Conditions Monitored by the Government
The business cycle Contraction: period of slow or no growth Trough: end of a contraction Recovery: period when business activity begins to grow again Peak: height of recovery

6 Recession and Depression
Foundations of Personal Finance Ch. 2 Recession and Depression Recession Extended period of slow or no economic growth Two or more quarters of negative growth Depression Occurs when a recession lasts several years or more Example: The Great Depression of the 1930s continued

7 Recession and Depression
Depression is characterized by high unemployment decline in retail sales lowered average personal incomes decreases in consumer spending reduced spending by businesses

8 Inflation Inflation threatens the nation’s prosperity
Today’s dollars buy less than last year’s dollars continued

9 Inflation Demand-pull inflation Cost-push inflation
Occurs when the economy is growing As demand goes up, prices go up Cost-push inflation Triggered by price increase of a widely used good, such as oil

10 Stagflation Stagflation is a period of slow growth and high inflation
Best example occurred in the 1970s Raised oil prices triggered inflation Slow economic growth, high unemployment

11 In Your Opinion What types of goods and services would likely cost more following increases in the price of oil?

12 Impact of Unemployment and Underemployment
Full use of productive resources, including labor force, ensures prosperity and stability Unemployment hurts workers, families Unemployment rate rises during periods of slow growth and contraction Government policies impact unemployment continued

13 Impact of Unemployment and Underemployment
Types of unemployment Frictional—job loss among workers temporarily between jobs Structural—job loss among people whose skills are not in demand; long-term Cyclical—job loss during economic contraction Seasonal—job loss among people holding temporary seasonal jobs

14 Underemployment Underemployment occurs when
people want to work full-time but can only find part-time work people settle for jobs requiring fewer skills and/or education than they possess

15 Factors Affecting Economic Policies
Economic goals of government Moderate the ups and downs of business cycles continued

16 Factors Affecting Economic Policies
Other economic goals of government Increase economic growth and prosperity Increase employment Keep inflation low Insure proper balance of trade in world markets

17 Fiscal Policy Fiscal policy, which is determined by the U.S. Congress, can stimulate the economy in periods of recession and high unemployment slow economic activity in periods of inflation

18 Gross Domestic Product
Gross domestic product (GDP) measures economic growth and includes consumer spending investments by businesses net exports of goods and services government spending continued

19 Gross Domestic Product
Real GDP is GDP adjusted for inflation Drop in GDP indicates weakening economy Rise in GDP indicates economic growth Unexpected spurt can indicate future inflation

20 Consumer Price Index Consumer price index (CPI)
Measures the movement of prices for a bundle of select goods and services Used to calculate cost-of-living increases for members of labor unions those receiving Social Security and pension benefits

21 Fiscal Policy During Recession and Inflation
During recession, fiscal policy is aimed at increasing the amount of money in circulation Government does this by increasing government spending lowering taxes so people have more money to spend continued

22 Fiscal Policy During Recession and Inflation
During inflation, fiscal policy aimed at decreasing the amount of money in circulation Government does this by decreasing government spending increasing taxes so people have less money to spend

23 Monetary Policy Monetary policy refers to actions by the Federal Reserve Board (Fed) to change the supply of money Fed regulates the nation’s money supply and banking system continued

24 Monetary Policy Federal Reserve System consists of
Federal Reserve Board, headed by a chairperson 12 Federal Reserve Banks across the country Federal Open Market Committee

25 Reserve Requirements Fed requires that banks and other financial institutions set aside a percentage of their total deposits High reserve requirement reduces amount of money banks have to lend Low reserve requirement increases amount of money banks have to lend

26 Discount Rate Fed sets the interest rate commercial banks must pay for credit Fed tends to lower discount rate during economic slowdown Fed tends to raise discount rate during periods of inflation

27 Open Market Operations
Fed buys or sells Treasury securities (bonds, notes, bills) Fed increases money supply by buying securities (puts dollars into circulation) Fed decreases money supply by selling securities (takes dollars out of circulation)

28 Easy Versus Tight Money
Easy monetary policy speeds up the economy because interest rates are relatively low more credit is available consumers borrow and spend more, increasing demand businesses borrow and spend more, creating growth and new jobs continued

29 Easy Versus Tight Money
Tight monetary policy slows down the economy because interest rates are relatively high less credit is available consumers borrow and spend less, decreasing demand businesses borrow and spend less, resulting in fewer jobs continued

30 Easy Versus Tight Money
Manipulating the economy is difficult The U.S. is part of a complex global economy with many interconnected parts It often takes months for policies to bring about desired changes Solving one problem can cause others

31 Foundations of Personal Finance Ch. 2
Taxing and Spending continued

32 Taxing and Spending Government buys goods and services from producers/sellers; capital from consumers Producers/sellers and consumers/workers pay taxes and receive programs, goods, and services from government continued

33 Taxing and Spending Tax revenues pay for government operations
services that private citizens cannot do items that private citizens do not produce

34 Redistribution of Income
Government redistributes income through progressive taxes (higher-income citizens pay a higher rate of tax) transfer payments (tax revenues pay for some financial assistance and benefits to certain individuals)

35 Deficit Spending and the National Debt
Deficit spending occurs when government spends more than it receives in revenues each year Surplus is created when government receives more than it spends continued

36 Deficit Spending and the National Debt
Excess spending and borrowing increase the national debt Government must pay interest on the amount owed; leaves less money to pay for other needs Taxpayers pay for the national debt in the form of increased taxes Debt threatens future economic growth

37 Government Regulations
Government involvement in the economy is growing Government regulation affects local, state, and federal levels Regulations seek to promote fair competition ensure public well-being and safety

38 Fair Competition Perfect competition is when many buyers and sellers exist continued

39 Fair Competition Competition among multiple sellers results in
lower prices for consumers better service greater innovation most efficient allocation of resources continued

40 Fair Competition Monopoly is when a single seller exists; seller can control price and supply Oligopoly is when a few large sellers exist; sellers can control price to a lesser extent than in monopoly continued

41 Fair Competition Lack of competition hurts consumers and the economy
Government’s anti-trust laws prohibit monopolies prohibit price fixing and collusion prohibit other unfair and deceptive trade practices promote competition and fair trade

42 The Public’s Well-Being and Safety
Regulations require equal opportunity fair labor practices workplace safety continued

43 The Public’s Well-Being and Safety
Regulations also require environmental protection pure foods, drugs, and cosmetics product safety truth in advertising and labeling truth in lending and savings

44 Costs of Regulation Regulations are costly because they
create extra work and costs for businesses put businesses at competitive disadvantage with unregulated businesses create extra work and costs for government (and citizens through taxes)

45 Government Agencies Serving Consumers
Department of Agriculture (USDA) Food safety, food production, nutrition education, international trade continued

46 Government Agencies Serving Consumers
Department of Energy (DOE) Promotes the development of reliable, affordable, and clean energy sources Department of Labor (DOL) Enforces labor laws, advances employment opportunities, provides labor statistics continued

47 Government Agencies Serving Consumers
Department of Health and Human Services (HHS) includes Centers for Medicare & Medicaid Office of Public Health and Science National Institutes of Health Centers for Disease Control and Prevention Food and Drug Administration continued

48 Government Agencies Serving Consumers
Food and Drug Administration (FDA) Enforces food safety; regulates drugs, tobacco products, cosmetics continued

49 Government Agencies Serving Consumers
Social Security Administration (SSA) Manages retirement, survivors, and disability insurance and supplemental security income programs Dept. of Housing and Urban Dev. (HUD) Promotes fair housing, home ownership continued

50 Government Agencies Serving Consumers
Consumer Product Safety Commission (CPSC) Enforces safety of consumer products Federal Trade Commission (FTC) Regulates advertising, promotes competition Securities and Exchange Comm. (SEC) Regulates security exchanges, protects investors from fraud continued

51 Government Agencies Serving Consumers
U.S. Department of the Treasury Collects taxes, pays nation’s bills, regulates banks, investigates financial crimes Federal Communications Commission (FCC) Regulates communications by telephone, television, radio, cable, wire, and satellite

52 Central Ideas of the Chapter
The goal of government economic policies is to create economic stability and prosperity for its citizens. Government enacts laws and regulations to ensure fair competition and to protect the public well-being and safety. Government agencies at all levels assist and protect consumers by providing information, protection, and services.

53 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back business cycle. A cycle of economic activity with periods called contraction, trough, recovery, and peak. collusion. When companies make illegal secret agreements, usually to engage in price fixing or to shut out smaller competitors. 53

54 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back consumer price index (CPI). A measurement of changes in the prices of selected consumer goods and services. deficit spending. When government spends more than it collects in tax revenues and must borrow money. depression. An extended period of economic recession. 54

55 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back Federal Reserve System. The U.S. government system that regulates the nation’s money supply and banking system. It is comprised of the Federal Reserve Board, 12 Federal Reserve Banks, and the Federal Open Market Committee. 55

56 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back fiscal policy. The government’s taxing and spending decisions. gross domestic product (GDP). The value of all goods and services produced by a nation during a specified period. inflation. An overall increase in the price of goods and services. 56

57 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back labor force. Composed of people, age 16 and over, who are employed or looking for and able to work. labor union. A group of workers who unite to negotiate with employers over issues such as pay, health care benefits, and working conditions. 57

58 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back monetary policy. Government actions that change the amount of money in circulation by controlling interest rates and credit terms. monopoly. A market situation in which one seller produces the entire output of a given product or service. national debt. The total amount the government owes at a given time. 58

59 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back oligopoly. A market situation in which a few large companies dominate an industry. perfect competition. A market structure in which competition between producers results in greater innovation, better service, lower prices, and efficient allocation of resources. 59

60 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back recession. An extended period of slow or no economic growth. stagflation. A period of slow growth and high inflation. tax. A fee imposed by a government on income, products, or activities, and paid by citizens and businesses. 60

61 Foundations of Personal Finance Ch. 2
Glossary of Key Terms Back underemployment. Workers who are employed only part time or who are “over qualified” for their jobs. unemployment rate. The percentage of the labor force that is out of work and seeking employment. 61


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