Exam 1 Flashcards
Describe role of public sector.
The public sector provides essential services to the population, regulates industries to maintain fair practices and protect consumers, stabilizes the economy through fiscal and monetary policies, reduces economic inequalities and supports the disadvantaged, ensures safety and security in the nation, and protects the environment.
What are the three main roles of the government in the economy?
Allocation, redistribution, and stabilization.
How does the government intervene in the market in these situations?
Underproduction of goods and services.
Provide subsibies for producers/lower proudction cost
How does the government intervene in the market in these situations?
Promoting economic growth.
Cutting taxes/adjusting government spending to benefit the people
How does the government intervene in the market in these situations?
Promoting positive externalities.
Provide subsidies for consumers and producers
How does the government intervene in the market in these situations?
Reducing negative externalities.
Impose Pigovian taxes on activities that generate harmful externalities
How does the government intervene in the market in these situations?
Addressing the costs of
asymmetric information
Government regulation and information disclosure requirements.
What are the four types of goods?
Private Goods, Club Goods, Common Pool Resources, and Public Goods
What does it mean when a good is excludable?
When a good is excludable, it means that access to the good can be restricted to those who pay for it.
Ex: Movie ticket
An example of a non-excludable good is clean air.
What does it mean when a good is rivalrous?
When a good is rivalrous, it means that its consumption by one person reduces the amount available for others.
Ex: Using the only hammer in the house (no one else can use at the same time)
An example of a non-rivalrous good is a public park.
What are private goods?
Private goods are products or services that are both excludable and rivalrous.
Ex: When you purchase a pair of shoes, you have exclusive rights to use them, and no one else can wear them without your permission.
What are club goods?
Club goods are a type of good that is excludable but non-rivalrous.
Example: At movie theatres, only paying customers can watch a movie, but one person’s viewing does not prevent others from watching the same movie.
What are common pool resources?
Goods that are non-excludable but rivalrous.
An example would be a shared water source. It is free to be used by many, but over-extraction by some users can reduce the water available for others.
What are public goods?
Goods that are both non-excludable and non-rivalrous.
An example for US citizens would be national security.
Are market mechanisms or government interventions more effective in directing the provision of private goods, club goods, common pool resources, and public goods?
Private: Market mechanisms are highly effective due to the nature of competition and demand.
Club: Market mechanisms are generally more effective.
Common pool: Government intervention is more effective than market mechanisms.
Public: Government intervention is essential to prevent free rider problem. Allows everyone equity of access.
What causes the free rider problem?
Occurs when individuals benefit from resources, goods, or services without paying for them, leading to overuse or under-provision of those resources.
What is the Federal Reserve?
The central bank of the United States, established to provide the nation with a safe, flexible, and stable monetary and financial system. It is connected to the federal government, but it operates independently within the government framework.
What is the role of the Fed?
Its primary responsibilities include conducting monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. Additionally, the Federal Reserve supervises and regulates banks to ensure the safety and soundness of the financial system, protecting consumers’ credit rights. It also works to maintain financial stability and manage systemic risks in financial markets. Furthermore, the Fed provides essential financial services to the U.S. government, financial institutions, and foreign entities, and oversees the nation’s payments systems to ensure efficient and secure transactions.
What is the Federal Funds Rate?
It is the interest rate at which banks lend reserves to each other overnight. The Fed adjusts the federal funds rate to help control inflation.
What is one way the Fed reacts to different market conditions?
When the economy is growing rapidly and inflation is rising, the Fed may raise the federal funds rate to make borrowing more expensive, which helps cool down economic activity and control inflation. Conversely, during economic downturns or recessions, the Fed typically lowers the federal funds rate to make borrowing cheaper, encouraging spending and investment to stimulate economic growth.
What is another way the Fed reacts to different market conditions?
By lowering reserve requirements, the Fed can increase the amount of funds banks have available to lend, which stimulates economic activity by making borrowing easier and cheaper. Conversely, raising reserve requirements reduces the funds available for banks to lend, which can help cool down an overheating economy and control inflation.
What the Treasury?
a key executive department of the federal government responsible for managing the nation’s finances
What is the role of the Treasury?
It is responsible for collecting federal taxes through the Internal Revenue Service (IRS), producing currency and coinage via the Bureau of Engraving and Printing and the U.S. Mint, and managing government accounts and public debt. The Treasury also advises on economic and financial policy, working to promote economic growth and stability. Additionally, it enhances national security by implementing economic sanctions and combating financial crimes.
What is one way the Treasury reacts to different market conditions?
In times of economic downturn, the Treasury may increase spending on targeted programs such as infrastructure projects, unemployment benefits, and other social services to stimulate economic activity and support those affected by the downturn. This increased spending can help boost demand, create jobs, and stabilize the economy.
Conversely, during periods of economic growth and rising inflation, the Treasury might reduce spending or focus on non-targeted spending cuts to prevent the economy from overheating.
