1. Government’s Role in the economy

2. Government’s Role in the economy
Creates millions of jobs
Improves the country’s economic infrastructure- the network that enables producers and consumers to participate in the economy
Transportation systems, public facilities
Provides loans to small businesses, collects taxes, provides services to the people
The government also influences the economy through regulation, fiscal policy, and monetary policy...

3. Government Regulation: Protecting Workers
Government regulation has four main goals:
Protect workers
Protect consumers
Limit negative effects
Encourage competition
Protecting Workers:
Govt. prevents businesses from taking unfair advantage of workers
Protect against discrimination (EEOC) and unsafe working conditions (OSHA)

4. Government Regulation: Protecting Consumers
FDA protects people from unsafe foods and medicines
CPSC make certain that consumer items (i.e. toys) are not dangerous
SEC protects investors from being cheated when they purchase stocks
FDIC insures banks can always back up your deposits up to $100,000

5. Government Regulation: Limiting Negative Effects
Another goal of government regulation is to limit the negative effects of some economic activities
Pollution for example
EPA creates rules to limit negative effects like air and water pollution

6. Government regulation: Encouraging Competition
Competition can benefit consumers (drive down prices) and help the economy grow (producers look for new, innovative ways to increase efficiency/earn profits)
Government regulations make certain companies compete fairly with each other

7. Government Regulation of private Property
Government does have the power to regulate use of property
If it benefits society and the economy
Control land use through zoning laws
Limit what type of business, industry, or neighborhood can be built where

8. Fiscal policy- Taxes
Federal government changes tax rates to affect the economy
Lower taxes means people have more money to spend on goods and services
Businesses sell more and hire new employees, but government revenue is cut
Government may raise taxes to slow down economic growth (inflation)
Tax Incentives- special tax deduction for doing something in particular

9. Fiscal Policy- Government Spending & Public Transfer Payments
Increases in government spending can increase demand and producers can hire workers to meet new demand
Government can spend less on goods and services to control economic growth
Demand declines, so businesses produce less and prices will not rise rapidly
Money given by the government to someone in need
i.e. unemployment compensations
Providing assistance to unemployed/disabled means these people can still contribute to the economy by purchasing goods and services

10. Fiscal Policy & Timing
Fiscal policy must be applied at the right time in order to work
The amount of time fiscal policy tools can take to work may present a problem
Positive effects of tax cuts may take months or years to show up
Fiscal policy is used with long-term effects in mind

11. Monetary policy
Determines the amount of money available in the economy at any one time
Used to promote economic stability
Government can promote or slow economic growth by controlling the supply of money
Federal Reserve Bank, or the “Feds” control monetary policy in the U.S.

12. Monetary policy
Before Fed can control amount of money available, it has to know how much money is already in the economy
Several methods:
Count only money that is readily available (cash, coins, checks)
Also count money in savings accounts or other certificates of deposit (CDs)
Other economists also consider investments such as savings bonds
Easy-Money Policy increases the amount of money in the money supply
Overall demand increases, encourages economic growth
Tight-Money Policy raises interest rates to discourage borrowing, and the amount of money borrowed declines
Consumers make fewer purchase, businesses do not expand, overall demand declines so prices do not rise too quickly

13. Tools of Monetary Policy- Open-Market Operations
Open-Market Operations is the buying and selling of government securities
These are bonds that the government sells to investors
If the Fed wants the money supply to contract, it sells government securities
Money used to invest in these bonds is removed from the money supply
If the Fed wants the economy to expand, it buys government securities back from investors
Money investors receives from the bonds go back into the money supply; more money = increases in demand

14. Tools of Monetary policy- Discount Rate
Discount rate is the interest rate the Fed charges to banks
If the Fed wants the economy to grow, it lowers the discount rate so banks borrow more money
They loan this money to borrowers
If the Fed wants to slow economic growth, it raises discount rates, so banks pass the higher interest rates on to borrowers so fewer people borrow money
Money supply contracts, economy does not grow as quickly

15. Tools of Monetary Policy- Reserve Requirement
Reserve Requirement is the mount of money banks must have available in their vaults or in Federal Reserve accounts
If the Fed wants to expand the money supply, it lowers the reserve requirement
If the amount of money a bank has to have on reserve is lower, it will try to loan more money
If the Fed wants to slow economic growth, it raises the reserve requirement
If the amount of money a bank has to have on reserve is higher, it will have less money to loan to customers
Individuals and businesses have less to spend- demand drops and economic growth slows

16. Monetary Policy & Timing
Fed must determine the current state of the economy before making monetary policy decisions
Fed must decide the best way to use monetary policy at that specific time
Have to determine the time it will take for businesses and investors to adjust to changes in monetary policy