Presentation on theme: "Chapter 3.2: How Government Promotes Economic Strength"— Presentation transcript:
1 Chapter 3.2: How Government Promotes Economic Strength Ch 3 Essential Question:What role should government play in a free market economy?Redistribute income?1
2 ObjectivesExplain why the government tracks and seeks to influence business cycles.Describe how the government promotes economic strength.
3 GDP and the Business Cycle One measure of the nation’s economic well-being is gross domestic product (GDP).Doesn’t say anything about the spread of income (level of inequality)Answer: Approximately 4 trillion dollars
4 GDP and the Business Cycle GDP goes up (expansion) and down (contraction)Extreme contraction is a recessionThis pattern of a period of expansion followed by a period of contraction is called a business cycle.Because of business cycles, people get hired and fired, spend more or less and invest more or less.This is one reason we need safety nets
5 GDP and the Business Cycle Why do we track GDP and other economic data?Monitor total output, prices, employment dataGovernment policy will be different depending on whether we are in expansion or in contractionExpansion: raise taxes, less government spendingContraction: lower taxes, more government spendingEconomists/politicians can use data to forecast the future and aid expansion/hurt contractionWill Congress expect more or less unemployment in the future?Does the government expect we will have more or less taxes in the future?
6 How Government Promotes Economic Strength? EmploymentGrowthStabilityGoalMore jobsLow unemploymentMore growth and higher standard of livingStable prices and banking sectorActionJob trainingUnemployment compensationHiring incentivesMore innovation (patents, research funds)College financial aidLess taxes/More spendingManage inflation (Federal Reserve)Regulate banks for economic security
7 How Government Promotes High Employment Employment (more on this in Ch 9)The government strives to make sure there are enough jobs for everyone who is able to workGovernment provides job training and unemployment compensation to achieve this goalUnemployment Rate Today: 8% (4-6% Goal)
8 How Government Promotes High Growth Economic GrowthMore growth leads to higher standard of livingTo promote growth, government targets innovation, technology and educationFunding research and development projects at universitiesEstablishing their own research institutions, like NASA, Department of Defense (DARPA)Granting patents and copyrights, which are an incentive to innovation
9 How Government Promotes Economic Stability One indicator of economic stability is the general level of pricesInflation is the change in the level of pricesHigh inflation means prices are rising rapidlyLow inflation means prices are stableDeflation means prices are falling (rare)Hyperinflation is such an extremely high inflation its almost too hard to count (extremely rare)
10 How Government Promotes Economic Stability The government wants stable prices for the economyThe US has stable and low inflationMany volatile countries with unstable governments or war have really high inflation (Zimbabwe, Iran, Pakistan, Brazil, Iraq to name a few)Households and firms want to expect stable prices, so they can plan their budgets and expensesIf I can’t expect prices for my budget items to stay stable, I can’t plan for today or the future.When there is uncertainty, firms do not make investments to grow their businesses10
11 How Government Promotes Economic Stability Other indicators of stability are financial institutions such as banks and the stock market.Regulations try to keep these institutions stable (SEC, FDIC, Federal Reserve)Government also protects these institutions as “too big to fail” – mega-controversialThe bailouts of the banks and financial institutions inMany taxpayers don’t view government as spending equally on its voters (Occupy Wall Street/Chicago)11
12 ObjectivesExplain why the government tracks and seeks to influence business cycles.To monitor important parts of the economy. To make forecasts of the future and try to influence the business cycle (more expansion/less contraction)Describe how the government promotes economic strength.promote high employment, high growth and stable prices/banks.
13 Key Terms Expansion: periods where GDP is increasing Contraction: periods where GDP is decreasingRecession: 2 (or more) straight quarters of GDP falling. At least 6 months.gross domestic product (GDP): the total income (value) of all final goods and services produced in a country in a given year. GDP per capita measures income per personbusiness cycle: a period of macroeconomic expansion, or growth, followed by one of contraction, or declinepatent: a government license that gives the inventor of a new product the exclusive right to produce and sell itcopyright: a government license that grants an author exclusive rights to publish and sell creative works