OGT – Chapter 8 Economics

Benchmarks A&B

1. All of us have unlimited wants but unfortunately we also have limited resources. In economics the problem of trying to meet our wants because of our limited resources is called scarcity.

2. Because all societies have scarce resources they experience scarcity. As a society then there are 3 basic questions that must be answered.

1. What should be produced?

2. How should it be produced?

3. Who should get what is produced?

3. The method a society uses to answer the basic questions above is known as its Economic System. The

four main types of economic systems are:

• The Traditional Economy which relies on customs and traditions which have been passed down from generation to generation.

• The Command Economy where the government or ruler decides how the questions will be answered.

• The Market Economy where individuals enjoy the freedom of making their own decisions and there is very little government interference.

• The Mixed Economy where a combination of all of the above types are used.

4. Fill out the following chart comparing the different types of Economic Systems.

Economic System

What to Produce?

How is It Produced?

Who Gets It? Effect on People’s Lifestyle

Traditional Economy

(Feudalism)

Set by tradition and custom

Set by tradition and custom

Set by tradition and custom

Provides members with stability and security but at the cost of individual freedom and economic growth.

Command Economy

(Communism)

Determined by the ruler or government

Determined by the ruler or government

Determined by the ruler or government.

Able to modernize society quickly but at the cost of a lack of consumer goods and personal freedom

Market Economy

(Capitalism)

Interaction of producers and consumers through the laws of supply and demand.

Producer decides what to produce; less efficient producers go out of business

Consumers purchase what they want and can afford

Able to respond to consumers needs; allows a free exchange of information.

Mixed Economy (Socialism)

The government and private individuals share the decision.

The government and private individuals share the decision.

The government and private individuals share the decision.

Citizens enjoy most freedoms except for some decisions.

5. Over the years the role of the U.S. Government in economic policy has changed. For many years we had a laissez-faire policy which meant that the government was not very involved in the economy. During the Progressive Era toward the end of the Industrial Revolution the government tried to ensure fair competition and public safety. During the Depression the government became much more active eventually passing the Full Employment Act in 1946. Today our government attempts to: Promote maximum employment and production and limit inflation.

6. Briefly describe the following Instruments of Government Economic Policy:

The power to provide Public Goods – Goods and services provided by the government to the economy directly like military defense.

Redistribution of Income – Graduated Income tax where the wealthy pay a higher rate of taxes and the money is then distributed to those less fortunate.

The power to regulate Economic Activities – Policies like the Sherman Anti-Trust Act which attempt to make sure things are fair and safe for everyone.

Fiscal Policy – How the government influences the economy by its spending, taxing and borrowing.

6. Briefly describe the following Instruments of Government Economic Policy: (Cont.)

Monetary Policy – The government’s ability, using the Federal Reserve System, to control the total money supply in our economy.

Trade Policy – The government’s ability to regulate American trade using a variety of techniques like tariffs, quotas, blockades and embargos.

7. Fill out the following chart which explains a government’s fiscal policy for each situation.

Economic Depression

Government should

spend more than it

receives in taxes

Government hires more workers and buys more

goods

More People are

employed ; then buy

more goods

Consumer demand creates more production jobs .

Inflationary Period

Government should

spend less than it

receives in taxes

Consumers will spend less

Businesses spend and

borrow less

Reduced consumer

demand leads to lower

prices

8. Fill out the following chart which explains a government’s monetary policy using the Federal Reserve System for each situation.

Economic Downturn

Federal Reserve puts more money

into circulation

Interest rates go down

Businesses borrow more; stimulating production

Consumers borrow more

to spend more on cars,

homes, etc Economic Upswing

Federal Reserve

reduces the money supply

Interest rates rise

Businesses borrow less

Economic growth is slowed to

avoid inflation.

9. Our government regulates trade several different ways including tariffs which are special taxes on imported goods, quotas which are restrictions on the number of goods a foreign country can import into the U.S. and a blockade or embargo which is a complete prohibition of trade with another country. (ex. Cuba). The biggest debate on trade centers on Protectionism vs. Free Trade; the former believes we need to protect American jobs by using the above methods making it tougher for foreign companies to compete while the latter believes that we should get rid of all restrictions which would encourage countries to specialize.