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The U.S. Economy and Government

Eventhough the economy relies heavely on free enterprise our government plays an important role in the operation of the economy; Goods and services count for more than 1/3rd of our nation's Grose Domestic Product

Public Sector

another turm referred to as our government

Privite Sector

another turm referred to as businesses

Role of Government in Our Economy According to Classical Economists (Hint 3 things)

~believe the government's role in the economy should be limited

~regard Supply and Demand as the most powerful and potentially benificial part of economic forces

~the best thing government can do for the economy is to keep its hand off and allow the markets to clear on their own

General view of Government Role According to Republicans

believe in the power of big businesses, thus urge the government's role in the lives of citizens to be as small as possible

General view of Government Role According to Democrats

believe government should be heavily involved in various economic issues

Other Economists Views on Governmental Role

like Paul Samuelson, believe too many problems that occur in the marketplace should be the laws of demand rather than external costs and it is up to the government to solve their own mistakes/problems

Examples of Minimal Wages

~many Democrats endorses the use of minimum wage laws to help low-income workers

~Classical Economists say such laws harm the very people they are intended to help
--By increasing labor costs, minimum wage laws make
it too expensive for many firms to hire as many low
wage workers

--As a result, those who might otherwise be employed
are not hired at all

Samuelson's (Democratic) View on Poverty

argue government-sponsored programs such as public housing and food stamps to reduce poverty

Classical Economist's View on Poverty

advocate taxing low-income families far less so they can keep more money earned

What do you think?

Should the government be run like a business that searches for the most efficient outcomes or should it strive to help as many people as it possible can?

Government's Roles in the U.S. (AMP it up!)

1) Arbiter
2) Manager
3) Participant


Establishing and enforcing private property rights describes this government role in the U.S. economy.
Protecting consumers describes this role of the US government.

External Costs

"Spillover Costs"
Ex: Boat Cleaning Shop whose chemicals kill the fish of
a seaside community

External Benefits

Public education, public parks, medical clinic who treat people against communicable diseases (a shot)

Functions of Government as an Arbiter

1) Ensure market Competition
2) The Sherman Antitrust Act of 1890
3) Protect Consumers

Market Competition

When competition is restricted and consumers have fewer choices which cause producers to feel pressured to reduce costs and eliminate inefficiencies

The Sherman Antitrust Act of 1890

made it illegal to create a monopoly, enter into a conspiracy to create a monopoly, or "restrain trade"

Protect Consumers

Government has been taken action to protect consumers from faulty products and deceptive advertising


providing goods and services

Ben Bernaky

Chairman of the federal government

Regressive Tax

Social Security Tax

Todays National Debt


Money Supply

Total amount of money in circulation at any given time

Classical Economists are Often Referred to as


NOT an Example of M2 Money

Foreign;large saving currency

Income Tax

Single large source of funding for federal government


Single largest source of funding for blank...

The Four Referee Roles the Federal Government Fulfills in the Economy

1) to enforce private property rights
2) to moniter external costs and benefits
3) to ensure market competition
4) to protect consumers

Social Security and Taxes

what the federal government does to manage the economy

The Two Principles of Taxation

1) the benefits-recived principle
2) the ability to pay principle

Proportional Tax

tax which the percentage of income paid in taxes is the same for all income levels

Progressive Tax

taxes a higher proportion of income from higher income

Regressive Tax

a tax for which the percentage of income paid in taxes decreases as income increases

Justifications and Criticisms of Federal Deficits and the National Debt

1) Annual Intrest payment on the national debt have been a large, growing portion of the federal budget
2) Largeportion of the federal budget
3) Deficits may reduce private investment
4)Deficits may trigger inflation

Services Banks and Financial Institutions Provide

1) Banks supply the economy with cash
2) Process checks and electronic transfers
3) Hould Reserves for Depository Institution
4) Serve as Banker to the Federal Government
5) Supervise and Regulate Banking Institutions
6) Regulate the Money Supply

How Banks Create Money

They cannot lend all the money entrusted to them because depositors have the rights to withdraw funds at any time; however expearience has shown deposits are greater than withdrawals

Roles and Responsabilities of Federal Reserve

1) issuing parer currency collecting and clearing checks
2) holding the banking system's regulating the money supply
3) along with other agencies supervising and regulating the nation's banking institutions

The Value of Money

There are two types of inflation: demand--pull and cost--push. Demand--pull inflation is when rising prices cause too much money "to chase" too few goods. Cosh-Push inflation is when rising prices result from increase in the cost of production caused by the increase of raw materials, the wage-price spiral. Inflation affects people differently; some suffer, others benefit. Those most likely to suffer are people living on relatively fixed incomes, savers, lenders, and businesses.


Stabilizing the economy describes this governmental role in the US economy. Promoting economic security describes this governmental role.


Providing goods and services describes this governmental role.

the republican party

political party generally considered in favor of big business most like classical economists

progressive tax

type of tax that takes a larger percentage of higher incomes and a smaller percentage of a lower incomes

regressive tax

Security tax considered to be this type of tax

property taxes

the single-largest source of funding for local governments

sales tax

the single-largest source of funding for state governments

personal income tax

the single-largest source of funding for the federal government

benefit payments

federal government spends most of its money on this

15.7 trillion

Approximately today's national debt

checking accounts

the largest component of the money supply

portability, uniformity, or divisibility

why bowling balls would not be acceptable currency

foreign currency; large savings accounts

not an example of M2 money

money supply

the total amount of money in circulation at any given time in a country


Our current banking system was actually started by these professionals

the fractional reserve system

our type of banking system where banks withhold a portion of their depositors' money and loan out the rest

district reserve banks


7 members and a chairman

board of governors is comprised of this many board members and one of these

Ben Bernanke

the current chairman of the Fed

voting rights, and paid,fixed dividends

the two main differences between preferred and common stock

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