0012 The Relationship between Politics and Economics (SMR 5.3) Flashcards
What is distribution?
division of total output among factors of production (capital, labor, property owners), mostly seen in terms of income distribution (i.e. what will the workers get paid?)
What is econometrics?
the process in which you measure the economy, done through the Gross Domestic Product and Gross National Product
What is the difference between the GDP and the GNP?
The Gross National Product (GNP) is the total value of all goods and services made by the country’s workers
The Gross Domestic Product (GDP) is the dollar value of all goods and services made in that country
(i.e. if a Japanese company builds cars in America, it is part of Japan’s GNP, but part of our GDP)
What are three types of markets and what are their means of distribution?
- Stock Market: means of increasing capital (i.e. New York Stock Exchange, NASDAQ, etc.)
- Commodities Market: distribution of commodities (like future industries and citrus crops)
- Derivatives Market: distribution of risks
All types of markets serve to distribute _______ in the economy among those participating
gains
What is an example of how the US has used incentives?
It used to offer incentives to public universities that it would give them money for each student they accepted, but this didn’t help the students as much as made universities try to recruit as many people as possible, so then they offered an incentive only for students who graduated which could also lead to universities only accepting people with high test scores or letting them slide through so they can graduate
If you mess up the incentives, the policy fails
What was Adam Smith’s idea of Laissez Faire Economics?
based on a perfectly free market, with no govt involvement in protection of producers and consumers, but not achievable in a practical sense
What are the three economic functions of capitalism in govt?
- Regulation: laws for the functioning of banks and financial markets; providing a strong judicial basis (i.e. establishing minimum wage, regulating who can work)
- Taxation: means of distributing part of the income for social services (education, health care, roads, bridges, etc.)
- Financing the government: government expenditures for military and civil issues
What is Fiscal Policy?
The means by which the government affects the economy, made by congress and the president through taxation, government expenditures, etc.
What are the three types of fiscal policies?
Neutral (static)
Expansionary
Contractionary
What does a neutral (static) fiscal policy mean?
A balanced budget where expenditure = income
What does an expansionary fiscal policy mean?
Spending more than income (debt)
What does a contractionary fiscal policy mean?
Spending less than income (surplus)
How does the government finance govt expenditures?
Can use taxation, sale of property, or “borrowing” from other countries with the idea that govt debt will be paid for by the expanding economy which justifies stimulus packages
What are some examples of what a stimulus package might do?
Cut taxes, extend benefits, extend unemployment
What’s an example of Obama’s expansionary govt fiscal policy?
In 2009, during the depths of the Great Recession, The American Recovery and Reinvestment Act was a stimulus build that added more than 8 hundred billion into the economy, split 60/40 between new govt spending and tax cuts, funded new roads, bridges, etc. and created new jobs
What are monetary policies?
Use of money and credit controls to influence interest rates, inflation, exchange rates and unemployment, implemented by the Federal Reserve
What are the two types of monetary policies?
Expansionary and Contractionary
What is expansionary monetary policy?
An increase in the total supply of money from the Federal Reserve
What are the pro’s and con’s of expansionary monetary policy?
Pros: More money can combat unemployment and help in a recession
Cons: More money generated causes inflation
If the GDP slows for two quarters, what will the Federal Reserve do in response?
Drop interest rates
What’s an example of expansionary monetary policy?
After the .com burst and 9/11, the US economy was in a slump. Output was low and unemployment was high, to speed up the economy, the Fed increased money supply which lowered interest rates, and the economy slowly started growing again.
What is Contractionary Monetary Policy?
A decrease in the supply of money from the Federal Reserve
What are the pro’s and con’s of Contractionary Monetary Policy?
Pros: Decreasing the money supply decreases inflation
Cons: Decreasing the money supply can slow economic growth leading to a recession
What’s an example of contractionary monetary policy?
In the late 1970’s, prices were rising up to 13% a year, Fed decreased money supply, causing interest rates to shoot up, so people bought less homes and cars, it brought down inflation but also caused unemployment
