0012 The Relationship between Politics and Economics (SMR 5.3)

Question 1

What is distribution?

Answer 1

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?)

Question 2

What is econometrics?

Answer 2

the process in which you measure the economy, done through the Gross Domestic Product and Gross National Product

Question 3

What is the difference between the GDP and the GNP?

Answer 3

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)

Question 4

What are three types of markets and what are their means of distribution?

Answer 4

1. Stock Market: means of increasing capital (i.e. New York Stock Exchange, NASDAQ, etc.)
2. Commodities Market: distribution of commodities (like future industries and citrus crops)
3. Derivatives Market: distribution of risks

Question 5

All types of markets serve to distribute _______ in the economy among those participating

Answer 5

gains

Question 6

What is an example of how the US has used incentives?

Answer 6

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

Question 7

What was Adam Smith’s idea of Laissez Faire Economics?

Answer 7

based on a perfectly free market, with no govt involvement in protection of producers and consumers, but not achievable in a practical sense

Question 8

What are the three economic functions of capitalism in govt?

Answer 8

1. Regulation: laws for the functioning of banks and financial markets; providing a strong judicial basis (i.e. establishing minimum wage, regulating who can work)
2. Taxation: means of distributing part of the income for social services (education, health care, roads, bridges, etc.)
3. Financing the government: government expenditures for military and civil issues

Question 9

What is Fiscal Policy?

Answer 9

The means by which the government affects the economy, made by congress and the president through taxation, government expenditures, etc.

Question 10

What are the three types of fiscal policies?

Answer 10

Neutral (static)
Expansionary
Contractionary

Question 11

What does a neutral (static) fiscal policy mean?

Answer 11

A balanced budget where expenditure = income

Question 12

What does an expansionary fiscal policy mean?

Answer 12

Spending more than income (debt)

Question 13

What does a contractionary fiscal policy mean?

Answer 13

Spending less than income (surplus)

Question 14

How does the government finance govt expenditures?

Answer 14

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

Question 15

What are some examples of what a stimulus package might do?

Answer 15

Cut taxes, extend benefits, extend unemployment

Question 16

What’s an example of Obama’s expansionary govt fiscal policy?

Answer 16

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

Question 17

What are monetary policies?

Answer 17

Use of money and credit controls to influence interest rates, inflation, exchange rates and unemployment, implemented by the Federal Reserve

Question 18

What are the two types of monetary policies?

Answer 18

Expansionary and Contractionary

Question 19

What is expansionary monetary policy?

Answer 19

An increase in the total supply of money from the Federal Reserve

Question 20

What are the pro’s and con’s of expansionary monetary policy?

Answer 20

Pros: More money can combat unemployment and help in a recession

Cons: More money generated causes inflation

Question 21

If the GDP slows for two quarters, what will the Federal Reserve do in response?

Answer 21

Drop interest rates

Question 22

What’s an example of expansionary monetary policy?

Answer 22

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.

Question 23

What is Contractionary Monetary Policy?

Answer 23

A decrease in the supply of money from the Federal Reserve

Question 24

What are the pro’s and con’s of Contractionary Monetary Policy?

Answer 24

Pros: Decreasing the money supply decreases inflation

Cons: Decreasing the money supply can slow economic growth leading to a recession

Question 25

What’s an example of contractionary monetary policy?

Answer 25

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