Economics Unit 3
The Role of Government
The government intervenes in the economy for many reasons, including social welfare, controlling market failures, and providing a national defense. The policies that the government creates in order to succeed in these areas also affect consumers and producers in different ways.
When it comes to national defense, every government has to decide how much to invest. They have to decide how much resources go to nation defense and how much goes to civilian goods. So, in this way, if national defense is being prioritized by the government, that also means it might be intervening in the economy.
The government also intervenes when it comes to flaws in the economic system, which usually means intervening in the case of monopolistic or simply unfair business practices.
The government also intervenes in the economy when it comes to environmental issues and worker safety issues. Unsafe practices, either for the environment or workers can cause major problems down the line.
When government intervention negatively impacts producers, that costs the producers, which may force the producers to cost the consumers for it to make up for the loss.
The government also passes laws that protects the rights of consumers. Usually these involve financial security and health security.
The government uses many specific organizes and policies that can intervene with the economy in order to protect its citizens,
The FDA regulates food and drugs to make sure that they are safe to consume
The Federal Communications Commission (FCC) intervenes in many communication-related areas in order to ensure affordable and available services, competition and innovation, and the regulation of profanity and such.
The National Highway Traffic Safety Administration regulates road safety to save lives and prevent injuries.
The Federal Trade Commission works to protect consumers and prevent anticompetitive business practices.
The Fair Credit Reporting Act ensures privacy and fair representation of consumer information.
The government also works to ensure property rights for its citizens, so that they have the authority to use, transfer, and benefit from the property they own.
Eminent domain is the government's ability to take private property for public use, but, as stated in the 5th amendment, can only do so if they pay for it.
Costs and Benefits of Government
Governments will try to create macroeconomic goals, which are main goals the government want to achieve related to its economy. These include higher GDP, full unemployment, economic equity, and economic stability.
Full unemployment does not necessarily mean no unemployment. Full unemployment does not account for situations where someone is currently unable to work, like someone moving between jobs, or a recent school graduate. There are also 3 types of unemployment.
Cyclical unemployment occurs due to negative changes in the economy which cause people to lose jobs.
Structural unemployment occurs when certain skills are no longer in demand.
Frictional employment occurs when someone is in the process of switching between jobs.
Economic stability occurs when an economy is experiencing constant economic growth and low inflation.
Economic equity is when each citizen has equal economic opportunities.
In order to achieve these goals, the government has a set of tools they can use to intervene in the economy. These are collectively known as the FIscal Policy.
One tools is known as the Contractionary Fiscal Policy. This allows the government to modify government spending and taxes.
Another tools at the government's disposal is the Expansionary Fiscal Policy. This allows the government increase spending and decrease taxes in order to incite economic growth.
The government can also control prices. It can interpret a price floor to essentially enforce a minimum wage through the prices of products and services. The government can also create a price ceiling if prices become too high for consumers to purchase.
Taxes
Taxes are leakages that are given to the government who then injects that money through expenditures which benefits the citizens. Governments are given the right to collect taxes due to Article 1, section 8. This also grants them the ability to decide how the taxes are spent. Depending on which level of government collects the taxes, they may be spent and collected differently.
Federal taxes are collected by the federal government. Federal taxes are mostly collected from people's income as well as the money made by corporations.
State taxes are mostly gathered from sales and property taxes. The state then uses these taxes for education, public welfare, and administration.
Local taxes are generated through property taxes, and are used to maintain local public services and infrastructure such as water systems.
The taxes we pay are either direct or indirect.
Direct taxes are paid by an individual and given directly to the government, and the tax payer bears the impact of the cost of taxes. Direct taxes include income taxes, corporate income tax, and property tax.
Indirect taxes are taxes that are not paid directly to the government. This includes sales tax.
Taxes can also be progressive, regressive, or proportional. Progressive tax increases as the income of the taxpayer increases, and regressive tax ignores income entirely. Proportional tax applies the same tax rate regardless of income.
Based on a number of factors, the government will spend the money they have collected through taxes differently. To organize and understand what they will spend it on, they create a federal budget to plan their revenue and expenditures.
Revenue is the money the government gains from taxes. With their revenue, the government gainss the funds for what they need, and other benefits such as social security and health care such as Medicare.
The government also spends money through Discretionary spending, which is money spent through the legislation process on things such as education and defenses.
If the revenue exceeds the expenditures, there is a surplus. If the expenditures exceed the revenue, there is a deficit.
Money and the Federal Reserve
There are 3 mains uses for money: store value, medium of exchange, and a unit of account.
The store value of money means that even if you store money for a long period of time, it will still have value in the future.
Medium of exchange means that it can be used to acquire and purchase goods and services.
A unit of account is a value that can be used to compare the values of goods and services.
Money has other characteristics, as well, including limited supply, durability, divisibility, uniformity, portability, and acceptability. It can also be divided into M1 and M2.
Divisibility means that the money can be divided into smaller units.Uniformity means that the money of the same amount is completely similar.
Portability means that the money can be transferred easily even in small spaces. Acceptability means that the money is universally used as an object of trade within its specific region.
Limited supply means that there is a finite amount of that resource. Durability means that the object in question can survive wear and tear and still be acceptable.
Money that is considered M1 is money that can be immediately used as is in transactions and purchases. This includes checking accounts.
Money that is considered M2 is money that needs to first be converted into its worth in actual currency before being used. This is for savings deposits and mutual funds.
Recently, people have been paying with credit and debit cards. When people use credit cards, their bank is charge that amount, and then the bank charges the person who bought the item. When someone uses a debit card, money is directly taken out of their bank account.
There are 3 main types of money; commodity money, representative money, and fiat money. Commodity money is something that has inherent value, representative money is an object that is not inherently valuable, but has value in being traded for something else, and fiat money that has value because the government orders it.
The Federal Reserve System is the central bank of the United States, and implements a government's monetary policy and monitors local banks.
The Federal Open Market Committee of the Federal Reserve can make decisions regarding the monetary policy. Some of the areas they control include Required Reserve Ratio, Federal Funds Rate, Discount Rate, and Open Market Regulations.
The Federal Funds Rate is the interest rate of overnight loans to other banks,
The Discount Rate is the interest rate on short term loans.
The Required Reserve Ratio is the amount of money any bank must keep on hand.
Open Market Regulations deals with government security,