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. Objectives
Explain 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 recession
This 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 data
Government policy will be different depending on whether we are in expansion or in contraction
Expansion: raise taxes, less government spending
Contraction: lower taxes, more government spending
Economists/politicians can use data to forecast the future and aid expansion/hurt contraction
Will 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?
Employment
Growth
Stability
Goal
More jobs
Low unemployment
More growth and higher standard of living
Stable prices and banking sector
Action
Job training
Unemployment compensation
Hiring incentives
More innovation (patents, research funds)
College financial aid
Less taxes/More spending
Manage 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 work
Government provides job training and unemployment compensation to achieve this goal
Unemployment Rate Today: 8% (4-6% Goal)

8. How Government Promotes High Growth
Economic Growth
More growth leads to higher standard of living
To promote growth, government targets innovation, technology and education
Funding research and development projects at universities
Establishing 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 prices
Inflation is the change in the level of prices
High inflation means prices are rising rapidly
Low inflation means prices are stable
Deflation 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 economy
The US has stable and low inflation
Many 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 expenses
If 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 businesses 10

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-controversial
The bailouts of the banks and financial institutions in
Many taxpayers don’t view government as spending equally on its voters (Occupy Wall Street/Chicago) 11

12. Objectives
Explain 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 decreasing
Recession: 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 person
business cycle: a period of macroeconomic expansion, or growth, followed by one of contraction, or decline
patent: a government license that gives the inventor of a new product the exclusive right to produce and sell it
copyright: a government license that grants an author exclusive rights to publish and sell creative works