Slide 1Copyright © Pearson Education, Inc.Chapter 3, Section 2

Chapter 3.2: How Government Promotes Economic StrengthChapter 3.2: How Government Promotes Economic Strength

Ch 3 Essential Question:• What role should government play in a free

market economy?

Redistribute income?

Slide 2Copyright © Pearson Education, Inc.Chapter 3, Section 2

ObjectivesObjectives

1. Explain why the government tracks and seeks to influence business cycles.

2. Describe how the government promotes economic strength.

Slide 3Copyright © Pearson Education, Inc.Chapter 3, Section 2

GDP and the Business CycleGDP and the Business Cycle

• One measure of the nation’s economic well-being is gross domestic product (GDP).

• Doesn’t say anything about the spread of income (level of inequality)

Slide 4Copyright © Pearson Education, Inc.Chapter 3, Section 2

GDP and the Business CycleGDP and the Business Cycle

• GDP goes up (expansion) and down (contraction)

– Extreme contraction is a recession

• This pattern of a period of expansion followed by a period of contraction is called a business cycle.

– Because of business cycles, people get hired and fired, spend more or less and invest more or less.

– This is one reason we need safety nets

Slide 5Copyright © Pearson Education, Inc.Chapter 3, Section 2

GDP and the Business CycleGDP and the Business Cycle• Why do we track GDP and other economic data?

– Monitor total output, prices, employment data

– Government policy will be different depending on whether we are in expansion or in contraction

• Expansion: raise taxes, less government spending

• Contraction: lower taxes, more government spending

– Economists/politicians can use data to forecast the future and aid expansion/hurt contraction

• Will Congress expect more or less unemployment in the future?

• Does the government expect we will have more or less taxes in the future?

Slide 6Copyright © Pearson Education, Inc.Chapter 3, Section 2

How Government Promotes Economic Strength?How Government Promotes Economic Strength?

Employment Growth Stability

Goal More jobs

Low unemployment

More growth and higher standard of

living

Stable prices and banking

sector

Action Job training

Unemployment compensation

Hiring incentives

More innovation (patents,

research funds)

College financial aid

Less taxes/More spending

Manage inflation (Federal Reserve)

Regulate banks for economic

security

Slide 7Copyright © Pearson Education, Inc.Chapter 3, Section 2

• Employment (more on this in Ch 9)

– The government strives to make sure there are enough jobs for everyone who is able to work

– Government provides job training and unemployment compensation to achieve this goal

– Unemployment Rate Today: 8% (4-6% Goal)

How Government Promotes High Employment How Government Promotes High Employment

Slide 8Copyright © Pearson Education, Inc.Chapter 3, Section 2

• Economic Growth

– More growth leads to higher standard of living

– To promote growth, government targets innovation, technology and education

• Funding research and development projects at universities

• Establishing their own research institutions, like NASA, Department of Defense (DARPA)

– Granting patents and copyrights, which are an incentive to innovation

How Government Promotes High Growth How Government Promotes High Growth

Slide 9Copyright © Pearson Education, Inc.Chapter 3, Section 2

• Economic Stability

– One indicator of economic stability is the general level of prices

– Inflation is the change in the level of prices

• High inflation means prices are rising rapidly

• Low inflation means prices are stable

• Deflation means prices are falling (rare)

• Hyperinflation is such an extremely high inflation its almost too hard to count (extremely rare)

How Government Promotes Economic Stability How Government Promotes Economic Stability

Slide 10Copyright © Pearson Education, Inc.Chapter 3, Section 2

• Economic Stability

– The government wants stable prices for the economy

• The US has stable and low inflation

• Many volatile countries with unstable governments or war have really high inflation (Zimbabwe, Iran, Pakistan, Brazil, Iraq to name a few)

– Households and firms want to expect stable prices, so they can plan their budgets and expenses

• If I can’t expect prices for my budget items to stay stable, I can’t plan for today or the future.

• When there is uncertainty, firms do not make investments to grow their businesses

How Government Promotes Economic Stability How Government Promotes Economic Stability

Slide 11Copyright © Pearson Education, Inc.Chapter 3, Section 2

• Other indicators of stability are financial institutions such as banks and the stock market.

– Regulations try to keep these institutions stable (SEC, FDIC, Federal Reserve)

– Government also protects these institutions as “too big to fail” – mega-controversial

• The bailouts of the banks and financial institutions in 2008-2009

• Many taxpayers don’t view government as spending equally on its voters (Occupy Wall Street/Chicago)

How Government Promotes Economic Stability How Government Promotes Economic Stability

Slide 12Copyright © Pearson Education, Inc.Chapter 3, Section 2

ObjectivesObjectives

1. Explain why the government tracks and seeks to influence business cycles.

To monitor important parts of the economy. To make forecasts of the future and try to influence the business cycle (more expansion/less contraction)

2. Describe how the government promotes economic strength.

promote high employment, high growth and stable prices/banks.

Slide 13Copyright © Pearson Education, Inc.Chapter 3, Section 2

Key TermsKey Terms

• Expansion: periods where GDP is increasing• Contraction: periods where GDP is decreasing• Recession: 2 (or more) straight quarters of GDP falling.

At least 6 months.• gross domestic product (GDP): the total income (value) of

all final goods and services produced in a country in a given year. GDP per capita measures income per person

• business cycle: a period of macroeconomic expansion, or growth, followed by one of contraction, or decline

• patent: a government license that gives the inventor of a new product the exclusive right to produce and sell it

• copyright: a government license that grants an author exclusive rights to publish and sell creative works