Ch. 5

Major Responsibilities of States

• Encourage economic growth

• Keep inflation low

• Maintain low unemployment

• Reduce economic inequality

Economic Policy Definition

• Course of action to influence/control economy behavior

• Includes:

  • Monetary policy

  • Fiscal policy

  • Job creation

  • Trade policy

Importance of Economy

• Determines quality of life (access to necessities)

• Supports public services, job creation, and social stability

Political Economy

• Examines relationship between the state and the economy

• Rational Choice theory emphasizes self-interest and decision-making

Variations in Economic Performance

• Factors:

  • Natural resources

  • Government mistakes

  • Human capital

  • Lack of manufacturing

  • Dependency relations

Income Inequality Policies

• Progressive taxation favors high-income groups

• Regressive taxation applies equally regardless of income

Government Options for Growth

• Encourage savings and investment

• Support education and job mobility

• Swift government response to crises

Structural Factors Affecting Economy

• Central Bank independence and accountability

• Corruption's economic distortion impacts

State Capacity Management

• Diminished by globalization and trade complexities

Key Terms

• Central Bank

• Corruption

• Inflation

• Progressive/Regressive Taxation

• Political Economy