...on attempting to manage the “Demand” side of the economy by using taxation and spending to redistribute income and wealth. The rationale is that redistribution of income and wealth via taxation and use of transfer payments [government spending] will drive the “Demand” function thereby driving the overall economy. The Keynesian model makes no distinction between tax rates and tax revenues and assumes that government spending in the form of transfer payments will increase or decrease demand based on the level of spending AND the spending multiplier. The spending multiplier can be expressed mathematically as: Spending Multiplier = 1 / (1 – MPC) in which MPC is the “marginal propensity to consume.” Keynesian economics is based on the view that lower income brackets have higher MPC, while higher income earners have lower MPC. Accordingly, the transfer of income and wealth to lower income earners will transfer into increased economic growth because every dollar of transfer payments in theory will have a higher multiplier effect. The increase or decrease of “taxes-and-spending” should accelerate [or decelerate] economic growth depending on how it is applied. Observations: Keynesian economics ignores or does not take into account that changes in tax rates and income/wealth redistribution will directly affect incentives to work, save and invest. Keynesian economics assumes that production capacity in the overall economy is a fixed variable and that capacity utilization...
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...Economic policy is the government attempting to stabilize the economy for the good of all people. Ways in which the government attempts to reach their goals is by being in charge of setting the right levels of taxation, government budgets, money supply and interest rates in the economy. All of these actions that the government takes influence the economy in some way. “Some types of economic policy actions can include setting interest rates through a federal reserve, regulating the level of government expenditures, creating private property rights and setting tax rates” (economic policy). Economic policy has many goals. Economic growth is one goal. If incomes of consumers and businesses are increasing over time then economic policy is working well for the economy and its people. Full employment is another goal. This goal for economic policy is to ensure that every member of the labor force who wants to work will find work. The last goal to mention is price stability. The goal of price stability is to stop both deflation and inflation from occurring. If inflation is set too high then prices of goods in the economy will be too high and not sold as much because consumers will not be able to afford them. “In an effort to eliminate uncertainty, the Fed has set a target rate of a steady 2% inflation rate” (McMahon). The Federal Government has an involved role in maintaining America's economy; they need to find the right balance working with numbers and economic expertise. When...
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...The role of government in the U.S economy extends far beyond its activities as a regulator of specific industries or gatekeeping. The government is also responsible for managing the overall pace of economic activity, with its objective of maintaining high levels of employment and controlling price stability (inflation). It has two main tools for achieving these goals: fiscal policies, which is done through taxes and spending and monetary policies, through which it manages the supply of money. In this paper, I will discuss the why high deficits of today will reduce growth rate of the economy in the future, look at the history of our nation’s debt and deficits, different elements that causes of deficit and why the cause actually matters, what role the fiscal and monetary policies have to lead to higher or lower budget deficits and how deficits affect the overall long-term economic growth and debt of the U.S. Let us first begin by learning the difference between the terms debt and deficit. In economics, the term deficit means a shortfall in revenue of a fiscal year. It is when the government’s revenue called receipts, which are collected taxes (payroll, corporate, excise, income and social insurance), fee revenues and tariffs that are called receipts are lower that what is spent called outlays. In other words, the federal budget deficit is the yearly amount by which spending exceeds revenue. The term debt is described as an accumulation of deficits so the national debt is the...
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...By 16 November 1914, a working Federal Reserve was set up in 12 cities chosen as regional Reserve Bank sites. These reserve banks were privately owned banks. The Federal Reserve wielded unprecedented power, which was noticed during the beginning of World War I (WW-I) when the Federal Reserve set interest rates for American banks and helped finance Europe’s war efforts until 1917, when the U.S. declared war on Germany and financing America’s war efforts became paramount (Education, 2013). “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small dominate men.” Woodrow Wilson (History of the Federal Reserve, 2013). As you can decipher from President Woodrow Wilson’s quote about the Federal Reserve, he believed Congress and himself gave the newly formed Federal Reserve far too much power and authority to dramatically change the America that President Wilson and his generation had come to know by its influence in national and economic policy. As we dig into the beast, known as the Federal...
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...CIA4U – Analyzing Current Economic Issues Comparative Systems Worksheet Instructions: The following chart will have you fill in geographic, social, political, and economic information on various countries. As you can imagine, each country represents a different type of economic system. Work in groups of 4 to complete this chart and once completed work as a group to answer the accompanying questions. The information can be found at the CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/index.html) |Indicators |Canada |United States |North Korea |Chad | |Geography | |Natural Resources – How many and what types of | |Coal, copper, lead, molybdenum, | | | |natural resources are available? | |phosphates, rare earth elements, | | | | | |uranium, bauxite, gold, iron, | | | | | |mercury, nickel, potash, silver, | ...
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...Paul Woods PSC 485 Dr. Edward Kwon 4-14-11 How the U.S Economy affects International Countries The United States of America has the most expansive economic system that out rivals any other country when compared to the U.S. The thought that if the United State’s financial system were to crumble would have a devastating effect for not only the United States but that of every other country in the northern as well as the southern hemisphere. It’s no surprise that the United States is one of the biggest exporter/importers in the world, but when the biggest country suffers economic turmoil, how does it affect the entire international community? The first question that I want to bring to the surface is what kind of impact does the Federal Reserve Bank have upon the United States economy and what exactly do their powers entail? In order to find out why our economy is in the shape it’s in, we must go straight to the source and find out what they are able to do as well as what must be done to keep our economy afloat. The second research question that I want to address covers the economic crisis that occurred in 2008-09, when Wall Street crashed, making it the second worst financial crisis since the Great Depression in 1929. We will deeper and examine the government bailouts and how it affected the GDP of domestic industry and on the international scale. Finally, our third question will be how we can focus our attempts to avoid instances like this in the future. We will look...
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...Smith Date: 11/28/2012 It would not be an overstatement to say that the U.S Economy is very strong at least compare to other countries. One is sure that listening to the news and the politicians in Washington, DC they render a different opinion. But these tactics are just to scare people and make believe on ideals that have nothing to do with the actual state of the Economy. The fact is we now live in a global economy and what happen in Europe can have a major affect in the U.S economy. The European Union is not very stable at this moment and probably never will be stable, because the adaption of the Euro has failed on its main objective. The U.S Dollar is still the preferred and trusted paper for the world to conduct trade. The role of the Federal Reserve is to keep that trust and confidence in the U.S Dollar at home and abroad. To gain more prospective on the role of the Federal Reserve it is imperative to answer and explain the following questions: Evaluate the role and effectiveness of the Federal Reserve in stabilizing the current economy. The American economy is a complex balance of services, financial, manufacturing, agricultural, and banking industries. For this reason, the U.S. is a global economy, relying upon foreign investments and trade to create and retain wealth. Over the years, America has evolved from farming-based, to industrial, to a services-based economy. As a result, the banking system from its inception has weathered the many growing...
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...Political Participation “Elites” have a great effect on political socialization and participation in America. There are three factors that affect socialization and political participation that stand taller than the rest. First is the limited growth in worker wages. While the wealthy businessmen continue to get richer and the lower class workers continue to get lower wages, the median of the incomes between the two is rising. (Dye) This allows for the minimum wages of lower class workers to keep decreasing and go unnoticed because statistics look at the median wages for Americans when in actuality, it is a combination of average and median values that give more accuracy in the perception of the state of worker wages. Regretfully, this truth is disregarded as many large businesses display those statistics and continue to mask this growing dilemma in our economy. Second, most electorates are completely oblivious about anything going on that does not directly affect them, and often they still don’t know anything about what is greatly affecting them. Because they are uninformed, they do not know of any problems and thus do not particularly care. This is demonstrated by the fact that many support certain institutions in which they do not support the people who run the institutions. (Dye) This is not necessarily due to elitists, but it does continue to drive a wedge further between the elites and the lower class, which is how the elites would prefer to make the decisions, being that...
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...Raising the minimums raises the maximums Most of our nation’s low-income jobs and positions are not paying like they used to. Is federal minimum wage at an all-time low? Are we not in the greatest country, where American’s who work harder live more wealthily and have more success? The first federal minimum wage legislation was created in 1938, where law stated that workers earned 25 cents an hour. Since then the federal minimum has been revised and increased twenty-two times. The federal minimum wage was ignored from the year 1981 to 1990, and again until in 2007 where wages were raised to $7.25 per hour. Eight years later, the minimum standard remains the same which is an issue for most American’s considered to be middle class today. Actually, today’s minimum wage is lower than any rate during the years between 1956 and 1985. Nearly a quarter of America’s working adults are laboring for wages that do not support families at the minimally acceptable level (Curry). A person working full-time at the federal minimum wage earns $290 in a week, around $15,080 for the year (Gillibrand). With an annual salary of $3000 less than the nation’s poverty level line, an average family of three will struggle to make ends meet. These low-income families will need government assistance, for basic living needs. At this rate of pay, even an average family who has two working/supporting parents will still have financial burdens. They will be considered a poor family, with house-hold income of...
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...effectiveness of the Federal Reserve in stabilizing the current economy. The American economy is a complex balance of services, financial, manufacturing, agricultural, and banking industries. For this reason, the U.S. is a global economy, relying upon foreign investments and trade to create and retain wealth. Over the years, America has evolved from farming-based, to industrial, to a services-based economy. As a result, the banking system from its inception has weathered the many growing pains associated with a new government and currency, instituting regulations and a centralized bank to examine the economy, and implement policies intended to offset factors negatively affecting the general financial health of the country. Now, as the United States moves towards a globally interdependent marketplace, the stakes are much higher than they were when Congress established the Federal Reserve in the early 1900’s. A country’s debt can now become the world’s debt, and the role of the U.S. federal banking system is now considerably more under pressure and scrutiny than ever before. As we have been seeing with the current liquidity crisis in the U.S., and how it has affected U.K. and Asian markets, strong, comprehensive policy-making is now crucial to sustaining long-term economic viability. Even despite the growing need for quick, precise actions by the Federal Reserve System, the decision-making regarding the economy often meets with controversy. The recent bailout plan, passed by...
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...Q1. The Chinese Government has recently cut 2012 GDP growth forecast to 7.5%. Chinese Government forecast to lower its GDP growth rate to 7.5% from an 8% in place since 2005, a signal that leaders are determined to reduce reliance on exports and capital spending in favor of consumption. In face of global turbulence and a pressing domestic demand for economic restructuring, China forecast a slightly lower GDP growth rate to achieve "higher-level, higher-quality development over a long period of time." To achieve steady growth, the government will continue to expand domestic demand and keep foreign demand stable, vigorously develop the real economic, so as to counter instability and uncertainty at home and abroad. In my view, there are two possible reasons for Chinese Government forcast to cut 2012 GDP growth at 7.5%. The first reason is to comply with the need of international economic situation and domestic population structure change. Since China joined the WTO in 2001, China economic growth at double-digital in many years, it is benefit from rapid global economic growth provide the overseas market demand pull. However, with the outbreak of the 2008 global financial crisis and the ensuing sovereign debt crisis in the United States and Europe, the global economic growth in a black outlook, the overall recovery of economic in developed countries will be a slowly and long process. It will affected China economic. In expanding United States and Europe export market, adjustment...
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...operations of the Reserve began in 1914. In order to provide the country with a safer financial system, Congress created The Federal Reserve System as the central bank of the United States. Today, the Federal Reserve’s responsibility falls into four general areas: conducting the nation’s monetary policy; supervising, regulating and other soundness of the country’s financial system; maintaining the stability of the financial system and providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions. The Federal Reserve can use the following tools to influence the money supply: Open Market Operations, The Required-Reserve Ratio and Discount Rate. The Federal Reserve uses Open Market Operations as its primary tool to influence the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Using Open Market Operations, Federal Reserve can affect the money supply by buying or selling the U.S. government securities. When the Federal Reserve purchases a government security from the public, it does so with money that did not exist in the system. Therefore making the bank reserve rise and increasing the money supply. The Required-Reserved Ratio specifies the amount banks must hold as reserves on all deposits and limits the amount that banks may lend out. If the Federal Reserve...
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...Chapter 31: Open Economy Macroeconomics: Basic Concepts Principles of Economics, 7th Edition N. Gregory Mankiw Page 1 1. Introduction a. This another important chapter because its conclusions differ from those that you often read in the newspapers. b. We are shifting from a closed to an open economy. c. Closed economy is an economy that does not interact with other economies in the world. P. 660. d. Open economy is an economy that interacts freely with other economies around the world. P. 660. 2. The International Flows of Goods and Capital a. The Flow of Goods: Exports, Imports, and Net Exports i. Exports are goods and services that are produced domestically and sold abroad. P. 660. ii. Imports are goods and services that are produced abroad and sold domestically. P. 660. iii. Net exports are the value of a nation’s exports minus the value of its imports, also called the trade balance. P. 660. iv. Trade balance is the value of a nation’s exports minus the value of its imports, also called net exports. P. 660. v. Trade surplus is an excess of exports over imports. P. 660. vi. Trade deficit is an excess of imports over exports. P. 661. vii. Balanced trade is a situation in which exports equal imports. P. 661. b. Case Study: The Increasing Openness of the U.S. Economy, P. 661. i. Over the last 50 years, both exports and imports as a share of GDP have more than doubled due to improvements in (1) transportation, (2) telecommunications, (3) technological progress and (4) the movement...
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...levels we've seen over the past few years. Although it's common knowledge that prices go up over time, the general population doesn't understand the forces behind inflation. What causes inflation? How does it affect your standard of living? This tutorial will shed some light on these questions and consider other aspects of inflation. What Is Inflation? Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand. There are several variations on inflation: Deflation is when the general level of prices is falling. This is the opposite of inflation. Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable...
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...monetary policy of the Greek government and the quazi-demands for a national bailout made by Finance Minister George Papaconstantinou. If the Greek economy collapses absent perpetuated bailout from other powers, the European universal currency will collapse. The intrinsically diverse European economies, ranging from moderate command-and-control orientation to heavy market influence, defy conglomeration and governance with a single currency. The uniform currency experience has ended in disaster. Because the Euro Zone effort to implement a homogenous monetary policy in a heterogeneous international body is economically untenable, the Euro as a currency will collapse. In 1986, European countries gathered together to initialize the ‘perfectly integrated competitive market economy’, using principles developed by economist Robert Mundell in the 1960s. These concepts emphasize liquidity of physical and financial assets, flexible interest rates, comparable business cycles and asymmetric fiscal policies for use in creating seamless interaction between international bodies within the economic area. This ‘Euro Zone’ exists as the pilot project of sorts for these principles. In 1992, they developed their own uniform currency, predictably named the Euro. Issuance of the Euro marked the beginning of the end for the Euro Zone as an economic power. From the very beginning, the Euro concept suffered from fatal design flaws. Before passing in 2006, economist Milton Friedman ominously warned,...
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