2. Chapter 18 Economic Policy

3. Chapter Outline and Learning Objectives
LO 18.1: The government’s role in regulating the economy has evolved over the nation’s history.During the nineteenth century, the national government defined its economic role narrowly and subscribed to a laissez-faire economic philosophy. By the 1890s, however, it became clear that the national government needed to take greater steps to regulate the economy, which it did by creating the Interstate Commerce Commission and passing antimonopoly legislation. Later, to help bring the nation out of the Great Depression, President Franklin D. Roosevelt’s New Deal in the 1930s brought increased government intervention in a number of economic policy areas including financial markets, agriculture, labor, and industry. In the 1960s and 1970s, the government expanded its role to include social regulations dealing with health, safety, and environmental protection. Finally, at the end of the twentieth century, a backlash occurred against regulation, and deregulation, or the reduction in market controls in favor of market-based competition, gained prominence.
LO 18.2: Fiscal policy is the deliberate use of the national government’s taxing and spending policies to maintain economic stability. Fiscal policy is influenced by many factors, including the global economy, which can affect income levels for American workers and increase international interdependence. The federal budget is one of the primary tools of fiscal policy; it can be manipulated to stabilize the economy and to counteract fluctuations in federal revenues. Except for a short period from 1998 to 2001, the federal government has generally run a budget deficit, which can have negative consequences for the economy over the long term.
Roots of Economic Policy
LO 18.1: Trace the evolution of economic policy in the United States.
Fiscal Policy
LO 18.2: Assess the impact of the budget process on fiscal policy.

4. Chapter Outline and Learning Objectives
LO 18.3: Monetary policy is a form of government regulation in which the nation’s money supply and interest rates are controlled. The Federal Reserve System (“the Fed”) was created in 1913 to adjust the money supply to the needs of agriculture, commerce, and industry. Today, it handles much of the day-to-day management of monetary policy. It has a number of tools to aid its efforts, including the ability to set reserve requirements, or government requirements that a portion of member banks’ deposits be retained as backing for their loans; control of the discount rate, or the rate of interest at which the Federal Reserve Board lends money to member banks; and open market operations, which involve the buying and selling of government securities by the Federal Reserve Bank in the securities market.
LO 18.4:Income security programs protect people against loss of income. Income security policy was not a priority for the federal government until the 1930s, when it passed the Social Security Act. Today, the federal government administers a range of income security programs that fall into two major areas: non-means-tested and means-tested programs. Non-means-tested programs are programs that provide cash assistance to qualified beneficiaries regardless of income; they include old age, survivors, and disability insurance, and unemployment insurance. Means-tested programs require that people have incomes below specified levels to be eligible for benefits; they include Supplemental Security Income (SSI), family and child support, the Earned Income Tax Credit (EITC), and the Supplemental Nutrition Assistance Program (food stamps).
Monetary Policy
LO 18.3: Analyze the effect of the Federal Reserve System on monetary policy.
Income Security Policy
LO 18.4: Describe the evolution of income security policy in the United States.

5. Chapter Outline and Learning Objectives
LO 18.5: By the end of 2008, the nation was in a full-blown recession, a decline in the economy that occurs as investment sags, production falls off, and unemployment increases. The national government identified the crisis situation quickly and took a number of actions to restart economic growth and stimulate the economy through the use of fiscal, monetary, and income security policy. In terms of fiscal policy, the Bush administration offered tax rebates and proposed a $700 billion federal bailout package for the banking industry known as TARP. When President Barack Obama took office, he worked with Congress to pass the $787 billion American Recovery and Reinvestment Act to help stimulate the economy and to maintain and create new jobs. In terms of monetary policy, the Federal Reserve Board responded to the crisis by cutting interest rates and engaging in open market operations and discount rate reductions. The costs of income security programs during this economic downturn have put a strain on both national and state budgets.
Toward Reform: Recession and Economic Recovery
LO 18.5: Evaluate the role of fiscal, monetary, and income security policy in the economic recession and recovery.

6. The 19th century: laissez faire and business cycles
Roots of Economic Policy LO 18.1: Trace the evolution of economic policy in the United States.
The 19th century: laissez faire and business cycles
The Progressive era
The Great Depression and the New Deal
Social regulation
Deregulation
To Learning Objectives

7. LO 18.1
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
To Learning Objectives

8. LO 18.1
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
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9. First serious use was in 1960s.
Fiscal Policy LO 18.2: Assess the impact of the budget process on fiscal policy.
Government maintains economic stability through taxing and spending policies known as fiscal policy: Keynesian economics
First serious use was in 1960s.
Revenue Act of 1964 reduced personal and corporate income tax rates.
Large partisan divide over government spending and budget deficits.
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10. Fiscal Policy in a Global Context
Click link to view graph of the historical minimum wage.
Photo caption: How has economic interdependence altered the American economy?
The cheap cost of labor abroad has led many Americans to lose their jobs, particularly at manufacturing plants. Here, workers at a factory in Pakistan assemble soccer balls.
Fiscal Policy in a Global Context
Globalization and income
minimum wage v. wages abroad
Increasing interdependence
2008 economic crisis spread swiftly abroad
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11. Used to fund government programs and stabilize the economy
LO 18.2
Click hyperlinks to view bar graphs, tables, and maps to explain these concepts.
The Budget
Used to fund government programs and stabilize the economy
Raising and spending money
The congressional budget process
Budget deficits and debt
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12. Keynesian economic contends that:
LO 18.2
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.
To Learning Objectives

13. Keynesian economic contends that:
LO 18.2
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.
To Learning Objectives 13

14. The Federal Reserve System (The Fed) The tools of monetary policy
Monetary Policy LO 18.3: Analyze the effect of the Federal Reserve System on monetary policy.
Click hyperlink to view a chart of how the Fed works.
Government also stabilizes the economy through monetary policy: managing the money supply and influencing interest rates.
The Federal Reserve System (The Fed)
The tools of monetary policy
Setting of the reserve requirement
Control of the discount rate
Open market operations
To Learning Objectives

15. LO 18.3
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.
To Learning Objectives

16. LO 18.3
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.
To Learning Objectives 16

17. The foundation of income security policy
Income Security Policy LO 18.4: Describe the evolution of income security policy in the United States.
The foundation of income security policy
The Great Depression
The New Deal
The Social Security Act of 1935
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18. Income Security Programs Today
LO 18.4
Click “income security programs” to view a table listing the number of recipients benefiting from each program.
Click “unemployment insurance” to view a map showing how unemployment rates vary by state.
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
To Learning Objectives

19. Which of the following is a non-means-tested program?
TANF
SSI
SNAP
unemployment insurance
earned income tax credit program
To Learning Objectives

20. Which of the following is a non-means-tested program?
TANF
SSI
SNAP
unemployment insurance
earned income tax credit program
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21. Income Security Policy Evaluating the Government’s Response
Toward Reform: Recession and Economic Recovery LO 18.5: Evaluate the role of fiscal, monetary, and income security policy in the economic recession and recovery.
Click ARRA to see how the stimulus money was used.
Use the photo to fuel a discussion about the government’s response to the economic recession.
Photo caption: Can economic stimulus payments fuel a troubled economy?
Economists disagree on the ability of economic stimulus payments, such as tax rebates, to right an economy on a collision course with itself.
Fiscal policy
TARP
ARRA
Monetary Policy
Income Security Policy
Evaluating the Government’s Response
To Learning Objectives

22. The purpose of TARP was to:
LO 18.6
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
To Learning Objectives

23. The purpose of TARP was to:
LO 18.6
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
To Learning Objectives 23

24. Figure 18.1: How has the national minimum wage changed over time?
The national minimum wage has increased from 40 cents an hour in 1947 to $7.25 in When inflation is considered,
however, workers earned their highest minimum wages in the 1960s and 1970s.
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25. Figure 18.3: How does the federal government raise and spend money?
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26. Table 18.1: How is the federal budget made?
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27. Figure 18.2: Who holds U.S. debt?
China holds the greatest percentage of American debt, but Japan and Great Britain also hold large amounts of U.S. Treasury securities.
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28. Figure 18.4: How does the Federal Reserve System work?
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29. Table 18.2: How many Americans benefit from income security programs?
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30. Figure 18.5: How do state unemployment rates vary?
In May 2010, the national unemployment rate was 9.7 percent. However, this rate varied tremendously across the country, with the highest levels in the South and West, and the lowest levels in the Midwest.
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31. Figure 18.6: Where did the economic stimulus funds go?
The American Recovery and Reinvestment Act allocated almost $800 billion to aid in the economic recovery. The largest proportion of these funds—more than one-third—went to tax cuts.
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