Government andthe EconomyUnit Six

Chapter 16

Government’s Role in Our Economy

Article I, Section 8 of the Constitution• Congress has the power to• Coin money• Collect taxes• Borrow money• Set up a postal service• Build roads• Regulate commerce

• Congress has the power to lay a foundation on which a market economy could flourish

Reasons the Government is Involved• There are a number of important ways the

government’s efforts have solved economic problems!

• Some businesses have earned profits unfairly•Working conditions have been unsafe and inhumane• Unsafe products have harmed consumers• To ensure economic security to all Americans• To stabilize the economy• To protect the environment

Ensure Fair Business Practices• In the late 1800s, Congress made

attempts to control monopolies• Companies cannot combine to control the market• Businesses that provide vital services have had legal monopolies• How are these legal monopolies

avoidable?

• In 1938, Congress banned false advertising

Protect Workers and Consumers• To ensure safe working conditions for employees• National Labor Relations Act of 1935• Occupational Safety and Health Administration (OSHA) was created in 1971

• To ensure the products we buy are safe• Food and Drug Administration (1927) makes sure the stuff we eat and drink is safe• Consumer Product Safety Commission (1972) keeps an eye on toys, tools, and household products

Who is really in charge? Pharmacies are big business today.

Provides Economic Security

• Began with FDR’s New Deal: a series of government programs that helped people dealing with the Great Depression• Social Security Act, passed in 1935•Welfare• GI Bill and government loans for college

Stabilize the Economy• A part of the free-enterprise system is

instability—sometimes the economy is up and sometimes it is down (recession)

• Monetary Policy: The Federal Reserve System (the Fed) controls the supply of money available, sometimes through interest rates

• Fiscal Policy: what the government decides to spend and what they decide to tax (that’s their income!)

Environmental Protection

• The Environmental Protection Act of 1970 created the EPA to protect our air, water, and soil

Methods Governments Use• Regulate businesses through laws and create

agencies to enforce these laws (Environmental Protection Agency)

• Make direct payment to individuals for food, shelter, medical care, etc. (Social Security)

• Own resources (national parks) and produce goods and services (hydroelectric power from the Hoover Dam)

• Pay for important economic activities (loans and grants for small businesses)

• Balance spending and collect taxes

How do we know if we’re in good shape?• Inflation: when prices rise—if prices go up,

spending goes down• Gross Domestic Product (GDP)—the value of a

country’s goods and services; a rising GDP means the economy is growing

• The Federal Budget—where is the money going?• How much income does the government have?• Income taxes—from our paychecks• Excise Taxes—on specific products (like gas)• Tariffs—taxes on imported products• Fees—charges for specific services (like visiting Yellowstone)• Sales—selling government land, buildings, etc.

Chapter 17

The Federal Reserve System

Creation• Why? Several financial panics occurred in the

late 1800s and early 1900s and people were worried about the safety of their money in the bank

• When? Passed by Congress in 1913• Where? Twelve Federal Reserve Districts

supervise banks in their area (we’re a part of the 4th District and its headquarters is in Cleveland)

• Who? There’s a Board of Governors with seven members; appointed by the President for 14-year terms

Functions of the Fed• It’s the government’s bank• They cash the checks that we write• Keep an eye on other banks to make sure they are

following the law• Loan money to banks• Control the supply of money available• Change reserve requirements (how much money banks need to keep on hand)• Vary interest rates• Buy and sell government bonds

Chapter 18

Public Finance

Paying for Government• Tax Fairness: everyone benefitting should pay,

right?• Types of Income Tax• Proportional: everyone pays the same amount• Progressive: the more you earn, the higher percentage you pay• Regressive: the less you earn, the higher percentage you pay

Types of Budgets

• Balanced: spending = tax revenues

• Deficit: spending > tax revenues

• Surplus: spending < tax revenues