State regulation

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State regulation

  1. 1. Review chapter 17 ("The Economy: Concepts and History") and chapter 18 ("Principles of Economic Behavior: Microeconomics and Macroeconomics") in Contemporary Society.
  2. 2.  Why do market economies require forms of regulation?  What is inflation?  What are the functions of fiscal and monetary policy?  What is the difference between fiscal and monetary policy?  What is the purpose of the Federal Reserve Bank?  In international trade, what kinds of protectionist policies do nations adopt?  Why do they do so?
  3. 3.  “Regulation” in this context means government intervention into (“regulation” of) particular parts of the economy. “State” regulation is regulation by the sovereign state; for example, regulation of the US economy by the US Government. “The results produced through market mechanisms are not always compatible with societal goals.” So, market economies sometimes have to accept (public) government intervention.
  4. 4.  Full employment  A desirable mix of economic output  High and equitable distribution of incomes  Reasonable price stability  Adequate economic growth  Fairness for all citizens  Protection of workers and consumers Generally speaking, government intervenes through fiscal policy, monetary policy or through direct regulation.
  5. 5.  Price inflation occurs when demand for a product or products cannot be matched by supply (so that currency has less buying power).  Price deflation occurs when there is more supply of a product than demand for it (currency has more buying power, but your assets are worth less, and you are probably paid less—because deflation will apply to labor and employment as well).
  6. 6.  Refers to government incomes (taxes) and outputs (expenditures). It is regulation of the economy on the basis of the taxing and spending policies of the government.  Fiscal policy is most often directed toward the goals of full employment and price stability.  Can be used to combat inflation by reducing government expenditures.
  7. 7.  The use of money and credit controls to affect economic outcomes.  Government can regulate banks (credit) by increasing or decreasing the “reserve ratio” necessary for banks, i.e., the ratio of reserve money a bank holds against the amount it lends. For example, if a 1:10 ration is required, then a bank must have in reserve at least 10% of the amount it has loaned out. The required ratio could be increased or decreased with a consequent effect on the amount of money in the economy.
  8. 8.  Government can also regulate the economy by controlling interest rates. Low interest rates will increase borrowing and thus increase economic activity.  Monetary policy is mainly under the direction of the Federal Reserve Bank (Fed). Note that the Fed has held its discount interest rate as low as possible since the time of the financial crisis, in an effort to stimulate the economy. It has had limited effect, however.
  9. 9.  Principal regulator of the money supply The Fed can increase or decrease bank reserves (i.e., how much money banks have available to lend) by buying or selling government securities (e.g., bonds). Effect on economy depends on (1) interest rates being responsive to bank reserves and (2) how responsive the economy is to interest rate changes. For example, (as per the previous slide) in the wake of the financial crisis the economy has not responded all that well to low interest rates.
  10. 10.  The use of wage and price controls to try to direct economic outcomes (such as inflation).  Used when monetary and fiscal policies fail to achieve the goals of full employment and reasonable price stability.
  11. 11.  Types of protective measures: tariffs, import quotas, licensing requirements, export subsidies  Goal: boost exports and impede imports  Reasons: political pressure from domestic industries—protect industry profits, protection ofAmerican jobs, fostering fledgling industries, etc.  There is a steady trend away from protectionist policies, in the name of free trade.

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