Unit 4 Government and the Market Economy

Private good examples

ice cream, cheese, houses, cars, etc

Public good examples

town road, park, or school

Necessary function of government

Essential roles and responsibilities that only a government can perform, such as providing public goods, maintaining law and order, and regulating markets.

Social goals

Objectives aimed at improving societal well-being, such as reducing poverty, ensuring education for all, promoting healthcare access, and fostering equality.

National budget and how they balance it

A financial plan outlining government revenue and expenditures for a fiscal year, balanced by managing revenue through taxes and borrowing responsibly to meet spending needs.

Social goals in regards to goods and services

Policies aimed at ensuring equitable access to essential goods (like food, housing) and services (like healthcare, education) for all members of society.

Trade-offs

Choices between alternatives, where pursuing one option typically means sacrificing another due to limited resources.

Economic security

Assurance that individuals and households can withstand economic hardships, such as unemployment or unexpected expenses, through stable income, savings, and social safety nets.

Limited free market opportunities

Restrictions or regulations placed on economic activities to prevent monopolies, ensure fair competition, or protect public interests.

Three questions that every society must answer

What to produce, how to produce, and for whom to produce, addressing resource allocation, production methods, and distribution of goods and services.

Economy of the US

A mixed-market economy characterized by private ownership, government regulation, and a balance between free market principles and social policies.

Four types of economies

Traditional (based on customs and traditions), command (government-controlled), market (based on supply and demand), and mixed (combining elements of market and command economies).

Monetary policy that decreases the size of GDP output

Actions by a central bank to reduce the money supply or increase interest rates to slow down economic growth and control inflation.

Different monetary policy solutions

Tools like open market operations (buying/selling government securities), reserve requirements, and discount rates used by central banks to influence economic conditions.

Tools of the Federal Reserve/goals

Tools include open market operations, discount rate adjustments, and reserve requirements, aimed at achieving goals such as stable prices, maximum employment, and moderate long-term interest rates.

Price of money

Interest rates that reflect the cost of borrowing money, set by market forces but influenced by central bank policies.

What happens when Feds buy bonds/government securities

Increases money supply, lowers interest rates, stimulates borrowing and spending, thus boosting economic activity.

Actions that contract/expand the money supply

Contraction through selling bonds, increasing reserve requirements, or raising interest rates; expansion through buying bonds, lowering reserve requirements, or reducing interest rates.

Rate that banks loan each other money

The federal funds rate, set by banks lending excess reserves to other banks overnight, influenced by the Fed's monetary policy.

Main purpose of the Federal Reserve

To promote stable prices, maximum employment, and moderate long-term interest rates through monetary policy.

FOMC (Federal Open Market Committee)

The Fed's policymaking body responsible for open market operations and setting the federal funds rate.

Federal Reserve Act

Legislation passed in 1913 that established the Federal Reserve System and its structure as the central banking authority in the United States.

John Maynard Keynes

British economist whose theories advocated for government intervention in the economy to manage economic fluctuations and promote full employment.

Classical view of economics

Emphasizes free markets, minimal government intervention, and self-regulating mechanisms to achieve economic equilibrium.

Fiscal policy that increases/decreases the size of GDP

Government actions affecting tax rates and spending levels to stimulate (increase) or cool down (decrease) economic growth.

Fiscal policy

Fiscal policy involves government spending and taxation

Monetary policy

monetary policy involves central bank actions on money supply and interest rates

Groups in charge of fiscal policy

Typically legislative bodies (e.g., Congress in the US) and executive branches that decide on government spending and taxation.

Recession

A significant decline in economic activity lasting more than a few months, marked by reduced GDP, increased unemployment, and decreased consumer spending.

GDP growth

GDP growth measures the increase in economic output over time

Per capita GDP

Per capita GDP divides GDP by population to assess average income levels.

4 components of GDP

consumption, investment, government spending, and net exports

what is GDP?

GDP (Gross Domestic Product) is the total value of goods and services produced within a country's borders

4 parts of business cycle

Expansion (growth), peak (maximum economic activity), contraction (recession), and trough (lowest point before recovery)

Business cycle

Fluctuations in economic activity characterized by periods of expansion and contraction.

Economy's health

Overall condition of an economy, assessed by factors like employment levels, inflation rates, and GDP growth.

Trough, growth, recession, peak

Sequential stages of the business cycle representing economic ups and downs.

Macroeconomics

Branch of economics dealing with aggregate economic factors such as national income, unemployment rates, and inflation

Phillips curve

Graphical representation showing the inverse relationship between inflation and unemployment rates.

CPI (Consumer Price Index)

CPI (Consumer Price Index) measures changes in prices of a basket of consumer goods

Unemployment rate

Unemployment rate measures the percentage of people without jobs who are actively seeking work

Types of inflation

Demand-pull (caused by excess demand), cost-push (due to rising production costs), and built-in (resulting from expectations of future price increases)

Deflation

A sustained decrease in the general price level of goods and services.

Types of unemployment and examples

Frictional (temporary joblessness between jobs), structural (mismatch of skills and job opportunities), cyclical (caused by economic downturns), and seasonal (due to seasonal changes in demand)

BLS (Bureau of Labor Statistics)

US government agency that collects and analyzes labor market data, including employment and unemployment statistics