Exam #2 Flashcards
(274 cards)
What is the economic policy ?
-Economic performance is extremely important to political outcomes.
-Incumbents at every level are punished when the national economy does poorly.
-Rewarded when it does well.
EX: Oil price increase due to Israel situation
People say economic policy is one of the things that moves the needle on public opinion. Why does this happen?
Imagine the economy touches everybody. Policy or issue that affects everybody. Everybody notices & large amount of media coverage
What is the role of economy in the govt?
-Traditionally thought of as separate spheres that define a country.
-how much of a role does the national govt have in the economy?- depends on the system of govt
Communism v Socialism v Capitalism
-High level of govt involvement typically associated w/ undemocratic systems
why?- people typically vote to get themselves more economic freedom when given the option.
-what we call socialism in the US is fully compatible w/ democracy (healthcare)
What is communisim?
high level of control, government control over the economy which means most GDP is controlled by govt.
What are foundational policies that in some areas overlap in govt & economy?
-Federal Reserve (money supply)
-Taxes
-Social Security
-Guarantee currency
-enforce contracts/ patents (sign into a business)
-regulating stack markets-> pause trading
-Trade agreements (who will be in business)
-Infrastructure
(baseline thing govt is doing)
Great Depression in economic policy?
-1930 when economic performance becomes a clear responsibility of govt
-obvious need for govt w/so much poverty & misery
What are the 2 levelers to influence economy?
Monetary
Fiscal policy
what is monetary policy?
(federal reserve) Controlling the money supply via the Central Bank
(Everybody wants the same thing in the economy)
what is fiscal policy?
(where we argue alot) Spenfing & taxing (happens in congress)
What is the economic business cycle?
Boom & bust cycle- where we see expansion or contractions
-> we want to see expansions
-> we want to see steady growth over time
-> want to avoid runaway
What causes Contractions?
happening for a long time, and no one was really clear that govt had any role or responsibility
-Economic contractions blamed on laziness, immigrants, drunkeness (temperance movement), acts of god
Who is John Keynes and why is he important?
Famous economist, suggest that contraction is caused by a demand spiral
1) An exogenous shock to the market (housing market collapse)
2) People have less wealth than they thought, afraid of uncertainty, etc so they spend less
3)business make less money so they hire and invest less
4) fewer jobs= less money to spend
5)and cycle gets worse
What is the government response to demand spiral?
Keynes argues spending can help reak out of demand spiral
How?- tax cuts (on everyone but mostly on low income) & Direct spending (Ex: infrastructure, public edu, healthcare)
What are the consequences of the govt response of demand spiral?
Govt debt (maybe a lot)
What about during expansion (economic)?
Economic expansion is a good but too rapid expansion can be worrisome
-inflation is process by which purchasing power of money becomes worthless overtime
->stuffing money in mattress is bad idea
-> Savvy peopleinvest their money in funds that will appreciate at higher than inflation rates
->when inflation outpaces actual GDP growth, you can have a problem.(want 2-5%)
what is the government response to expansion?
Fiscal Policy repsonse to increase level of inflation is to try to reduce spending.
1) raise taxes
2) Cut spending
Idea is to slow down the rate at which money is cycling through the economy
what is counter cycle spending?
intellectual centerpiece of modern fiscal policy
- add money to economy during downturns, subtract money during periods of overheating
- also called demand-side or keynesian economics
What is monetary policy?
is what the central bank (federal reserve) does
- even more important than fiscal policy
-we don’t hear as much about it bc it is a rare area that isn’t so political
What is control money supply?
like fiscal policy, goal is to control the rate at which money is circulating through economy
-balancing inflation w/demand problems
Big mechanism is to control lending rates
What is the lender of last resort?
Federal reserve is the bank of last resort (insures & lends to other banks)
Charge other banks interest on these loans which is prime rate
Banks then loan money to people & business and charge them an interest rate is prime + whatever appropriate based on credit history
Why would we adjust prime rates?
If federal reserve is worried about inflation, they will rise lending rates thus arresting the flow of money
- cooling effect
EX: inflation reduction act-> goes through treasury as fiscal policy
What is cooling effect?
cooling down the economy
What is the chair person?
-most powerful positions in the world.
-rarely make public statements bc every utterance can affect the stock market
-long tradition of appointing serious economic/ banker types