American Economy Final

set 1

Welfare Capitalism

Definition: A form of capitalism where private property exists, but the government intervenes through social programs, social insurance, and regulations to protect citizens from market failures and provide economic security.

What is the relevance of Welfare Capitalism?

Helps reduce inequality, stabilize the economy, and provide a safety net during economic downturns.

How do governments intervene in Welfare Capitalism?

Through social welfare programs like healthcare, unemployment insurance, and pensions.

Which countries are examples of Welfare Capitalism?

Countries like the U.S., Sweden, and Germany.

When did Welfare Capitalism become more prominent?

After the Great Depression with the implementation of New Deal policies.

Why was Welfare Capitalism implemented?

To reduce economic insecurity and protect citizens from market failures.

What are examples of social programs in Welfare Capitalism?

Social Security, Medicare, unemployment insurance, and subsidies.

What are normative theories?

Statements about how the world should be or ought to be.

Are normative theories testable or falsifiable?

No, they are value-based and not testable or falsifiable.

What is the relevance of normative theories?

They justify policy decisions, social justice goals, and redistribution of resources.

How do normative theories work?

They use moral reasoning to argue for or against specific policies or economic systems.

Who typically uses normative theories?

Policy analysts, ethicists, and social reformers.

In what contexts are normative theories used?

In debates on healthcare, minimum wage, and welfare policies.

Why are normative theories important?

To justify interventions in the economy to improve equity, fairness, and social justice.

Give an example of a normative claim.

"Healthcare should be free for all."

What is a normative claim about minimum wage?

"The government should increase the minimum wage."

What are Positive Theories?

Statements that describe how the world is based on facts and are testable through observation or evidence.

What is the relevance of Positive Theories in economics?

Provides the foundation for empirical research in economics and policy analysis.

How do Positive Theories work?

Uses data, evidence, and factual analysis to understand how people behave in markets.

Who uses Positive Theories?

Economists, policy analysts, and researchers.

When are Positive Theories used?

Used in economic forecasts, market analysis, and the evaluation of policy impacts.

Why are Positive Theories important?

To understand how changes in taxes, interest rates, and wages affect behavior.

How do Positive Theories demonstrate cause-and-effect relationships?

Uses empirical models.

Give an example of a Positive Theory.

"Increasing the minimum wage by 10% will reduce employment by 2%" (this is testable using data).

Provide another example of a Positive Theory.

"When gas prices increase, people drive less" (a factual statement that can be tested using empirical data).

What is the definition of Collective Action?

The process by which individuals work together to achieve a common objective or goal.

What does Collective Action explain?

The formation of interest groups, unions, protests, and lobbying organizations.

What problem must individuals overcome to achieve Collective Action?

The free-rider problem.

Who are some examples of groups that engage in Collective Action?

Labor unions, civil rights movements, student protests, and political advocacy groups.

When did the Civil Rights Movement occur?

In the 1960s.

Why do people engage in Collective Action?

To achieve shared goals that benefit all members, such as higher wages or civil rights.

How do people organize for Collective Action?

By organizing protests, petitions, and strikes to pressure policymakers or firms.

What is an example of Collective Action in labor?

Workers collectively negotiate for higher pay.

What is an example of Collective Action in climate change activism?

Groups like Extinction Rebellion engage in collective action to pressure governments to adopt green policies.

What is the definition of the Free-Rider Problem?

When individuals can benefit from a good or service without paying for it, leading to underproduction or depletion of the good.

What is an example of a public good affected by the Free-Rider Problem?

Clean air

Why are public goods like national defense undersupplied in free markets?

Because individuals can benefit without contributing, leading to underproduction.

How does the Free-Rider Problem lead to market failure?

When people don't contribute but still benefit, it reduces the incentive for others to contribute.

Who can be a free rider?

Everyone in society.

When does the Free-Rider Problem occur?

In the provision of public goods that are non-excludable and non-rival.

Why do people have an incentive to free ride?

Because they can enjoy the benefits of public goods without having to pay for them.

How is it difficult to exclude people from public goods?

It's hard to exclude people from enjoying public goods, so they won't voluntarily pay for them.

What is an example of the Free-Rider Problem in group projects?

When one person relies on others to do the work.

What are some examples of public goods?

Clean air, public parks, and national defense.

What is rent-seeking?

The practice of individuals or firms using political influence to obtain economic benefits without providing value or producing goods/services.

How does rent-seeking affect the economy?

It increases inefficiency, wastes resources, and creates deadweight loss.

How do firms engage in rent-seeking?

Firms lobby governments to pass laws that give them subsidies, tariffs, or other benefits.

Who typically engages in rent-seeking?

Corporations, industry associations, and lobbying groups.

When does rent-seeking commonly occur?

During the process of tax law changes, tariff policy, and regulation exemptions.

Why do groups engage in rent-seeking?

To secure financial benefits, like tax cuts, for specific groups.

What is an example of rent-seeking related to corporate tax breaks?

Large firms, like Amazon, lobby for tax breaks when building warehouses.

How do professional organizations engage in rent-seeking?

They lobby for stricter licensing rules to reduce competition.

What is the Median Voter Theorem?

In a majority-rule election, the policy outcome will reflect the preference of the median voter if preferences are single-peaked.

Why do politicians target swing voters in elections?

To adopt moderate policies that appeal to the largest number of voters.

How do candidates move in relation to the median voter?

Candidates shift toward the preferences of the median voter to win elections.

Who are the key players in the Median Voter Theorem?

Politicians, policymakers, and swing voters.

When does the Median Voter Theorem apply?

In every democratic election where candidates seek a majority vote.

Why do candidates move to the political center?

To appeal to the largest number of voters and win elections.

Give an example of the Median Voter Theorem in U.S. Presidential Elections.

Candidates shift to the center in swing states to capture the median voter.

How might local elections reflect the Median Voter Theorem?

City council candidates may prioritize crime control if it's the top concern of the median voter.

What is the Congressional Budget Office (CBO)?

A nonpartisan agency that provides budget analysis, cost projections, and economic forecasts for Congress.

What is the relevance of the Congressional Budget Office (CBO)?

Ensures transparency in federal budgeting, provides forecasts of the impact of laws, and limits rent-seeking.

How does the Congressional Budget Office (CBO) assist Congress?

The CBO evaluates the economic impact of proposed laws to guide Congressional decision-making.

Who uses the Congressional Budget Office (CBO)?

Congress, policymakers, and journalists.

When does the Congressional Budget Office (CBO) analyze budget proposals?

Before legislation is passed.

Why does the Congressional Budget Office (CBO) exist?

To prevent manipulation of budget numbers by political actors.

How does the Congressional Budget Office (CBO) issue its findings?

It issues reports that forecast the economic impact of laws and policies.

What example illustrates the work of the Congressional Budget Office (CBO)?

The Affordable Care Act (ACA) was reviewed by the CBO to determine its impact on the federal budget.

What is the Office of Management and Budget (OMB)?

A federal agency that prepares the president's budget and reviews funding requests from executive agencies.

What is the relevance of the Office of Management and Budget (OMB)?

Helps the president prioritize spending and analyze which policies to fund or cut.

How does the Office of Management and Budget (OMB) work?

Federal agencies submit funding requests, and the OMB decides how to allocate funds.

Who does the Office of Management and Budget (OMB) work with?

Works directly with the Executive Branch.

When does the Office of Management and Budget (OMB) operate?

During the budget planning process each fiscal year.

Why does the Office of Management and Budget (OMB) exist?

To ensure the president's policy priorities are funded.

How does the Office of Management and Budget (OMB) review funding proposals?

Reviews funding proposals from agencies and performs cost-benefit analysis.

What role did the Office of Management and Budget (OMB) play during the COVID-19 stimulus package?

The OMB played a key role in structuring the COVID-19 stimulus package under President Biden.

What is the Treasury Department?

The federal agency that manages U.S. government finances, debt, and currency.

What is the relevance of the Treasury Department?

Ensures financial stability, issues debt, and manages federal spending.

How does the Treasury Department collect revenue?

Collects taxes, issues U.S. Treasury bonds, and funds government programs.

Who does the Treasury Department work with?

Works with Congress, the Federal Reserve, and the President.

When does the Treasury Department play a role in financial crises?

Plays a role in managing financial crises, such as the 2008 financial crisis.

Why does the Treasury Department issue debt?

To ensure the U.S. has funds to finance government spending.

What is an example of the Treasury Department issuing debt?

The Treasury issued bonds and notes to fund the COVID-19 relief stimulus.

What is the Federal Reserve?

The central bank of the United States.

What does the Federal Reserve control?

Interest rates, inflation, and the money supply.

What is the relevance of the Federal Reserve?

It stabilizes the economy during recessions and inflationary periods.

What monetary policy tools does the Federal Reserve use?

Open market operations, interest rate changes, and reserve requirements.

Who leads the Federal Reserve?

The Board of Governors and the Federal Open Market Committee (FOMC).

When does the Federal Reserve act?

During financial crises, such as COVID-19 and the 2008 recession.

Why does the Federal Reserve take action?

To stabilize inflation, unemployment, and economic growth.

How does the Federal Reserve stimulate the economy?

By using interest rate cuts, bond purchases, and reserve requirements.

What action did the Federal Reserve take during COVID-19?

It lowered interest rates to 0% to stimulate the economy.

What are the key goals of economic policy?

Efficiency, equity, economic growth, and stability.

What determines government intervention in taxation, welfare, and monetary policy?

The key goals of economic policy.

What types of policies are designed to achieve economic goals?

Fiscal policy (taxes) and monetary policy (interest rates).

Who are the main actors involved in economic policy?

Policymakers, governments, and central banks.

When are economic policies typically used?

In response to economic shocks and recessions.

Why are economic policies implemented?

To ensure sustainable economic growth, fairness, and stability.

What trade-off is often made in welfare policies?

Between equity and efficiency.

What example illustrates a trade-off in economic policy during the COVID-19 pandemic?

Stimulus checks promoted stability but increased debt.