Unit 6, 7, 8

Review

Unit 6 ~ Government’s Role in the Economy

• A nation’s overall levels of income, employment, and prices are determined by the interaction of spending and productive decisions made by all households, firms, and government agencies in the economy.

• There is an economic role for the government to play in a market economy. Governments provide public goods, address externalities, define and protect property rights, encourage competition, and redistribute income.

• The Federal government’s fiscal policy influences the overall levels of employment, output, and prices.

What role does the government play in a market economy?

Unit 6

1. Identify two characteristics that make it necessary for government to pay for goods and services (why they cannot be done for profit).

• Shared consumption ~ the usefulness of good/service does not diminish when one person uses the good or service.

• Non-exclusion ~ non-payers (free riders) cannot be kept from receiving good or service.

 2. Nobody likes taxes; identify two economic reasons why government imposes taxes.

• Raise revenues for government (source of income to pay for spending)

• Discourage behavior• Promote certain industries• To redistribute income/wealth 3. Define a regressive tax and cite an example.• A regressive tax takes a larger percent of income from lower

incomes than from higher incomes. Everyone pays the same $ amount. Gas tax, sales tax, park fees

Unit 6

3. Define a progressive tax and cite an example.•  A progressive tax takes a larger percent of income from upper

incomes than from lower incomes. Income tax; tax brackets4. Government regulation places restrictions on businesses. Cite

a specific example where Americans are better off because of limitations.

• Protect from unsafe products & fraud• Restrictions on food prep, safer products less illness FDA• Restrictions on insider trading in stocks, same information

gives everyone ability to invest and accumulate wealth SEC 5. Economic stability is characterized by low inflation, low

unemployment, and slow growing GDP. How can the federal government use fiscal policy to fight a recession?

• Fiscal policy to stimulate the economy: decrease taxes and/or increase government spending.

Unit 7 ~ Money, Banking, and the Federal Reserve

• Money makes it easier to trade, borrow, save, invest, and compare the value of goods and services.

• The Federal Reserve’s System’s monetary policy influences the overall levels of employment, output, and prices.

How does money facilitate economic activity?

Unit 7

7. Explain the three functions of money: medium of exchange, store of value, and unit of account.

•  Medium of exchange; ability to buy goods and services• Store of value; ability to save for future• Unit of account; ability to compare value through pricing8. Explain fiat money & fractional reserve banking in support of the statement:

“Confidence is vital for the U.S. financial system to function properly”. •  Fiat money is a currency that has no intrinsic value, only government

declaring it “legal tender”.• Fractional reserve banking requires financial institutions (banks) to keep a

portion of all deposits on hand. This allows banks to invest/loan money to earn money.

• If consumers/businesses did not have confidence in the value of currency or integrity of financial institutions there could be an economic collapse.

9. The Federal Reserve System is the nation’s central bank. Identify the Chairman of the Board of Governors and the number of districts.

• Chairman ~ Ben Bernanke; 12 districts

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10. Identify the three major purposes of the Federal Reserve System.• Bank for bank’s ~ providing access to funds in times of crisis• Supervision and regulation of banks ~ create rules & enforce rules

so banks make “wise choices” and don’t take on too much risk• MONETARY POLICY ~ ability to change the money supply which

influences interest rates, changing incentives to save or spend. 11. Define inflation and explain how it can create economic hardship

for people.• Inflation is the rise in prices throughout the economy• It creates financial hardship because purchasing power decreases

and people have to pay more for the same goods and services.• Especially fixed income, lenders, business investing 12. How does monetary policy work if the Federal Reserve is trying

to fight inflation?• Federal Reserve will reduce the money supply; increase interest

rates which discourages spending and encourages saving.

Unit 8 ~USA in the Global Economy

• Voluntary exchange occurs only when all parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.

• When individuals, regions, or nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increases.

• Costs of government policies sometimes exceed benefits. This may occur when the actions by special interest groups can enact trade barriers which can impose a cost on the general public.

Why do people of different nations trade?

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13. Define globalization and it’s trend in the world economy in the last twenty-five years.

• Globalization is the growing interconnections politically, economically, and socially. People, business, and nations are becoming increasingly interdependent. A driving force of globalization is the expansion/improvements in technology.

14. Explain the theory of comparative advantage and how it is used to promote greater trade between nations.

• Comparative advantage is the economic theory that an individual or nation specializes in the producing of a good/service with the lowest opportunity cost. “Do what you do best and trade for the rest”

• Increased efficiency greater output, creates wealth, lowers prices for consumers

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15. Not everyone agrees, world trade is good for people or the planet. Cite three arguments against increasing world trade.

• Outsourcing of jobs ~ loss of jobs is the opportunity cost of specialization

• Dependence on other nations• Concern about quality or safety of products produced

outside the U.S.16. Explain how trade policy is enacted in the United States

and influenced by protectionists.• Trade policy is approved by President and Senate• Protectionists attempt to use trade barriers to save jobs.

Imposing tariffs/quotas to favor domestic production.

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17. Define tariff, quota, subsidy, embargo and what trade flow it impacts.

• Tariff is a tax on import ~ decrease import• Quota is a specific number of product that can legally enter a country in

a given year ~ decrease import• Embargo is complete ban on trade ~ decrease import• Subsidy is a payment to a producer ~ increase export18. Identify and explain the purpose of WTO & NAFTA. WTO ~ lower trade barriers to encourage free trade, improve standard of

living, settle trade disputes between nations, provide common set of regulations

NAFTA ~ US, Mexico, Canada agreement to lower trade barriers which encourages free trade, improve standard of living

19. Draw a Circular Flow of a Mixed, Open Economy. (label all flows) • Extra Credit for correctly adding the financial sector (banks, Federal

Reserve)

World

Export

Import

$

$

Banks