organization of the u.s. economy why does the federal government collect revenue? – two reasons:...

Organization of the U.S. Economy • Why does the federal

government collect revenue?

– Two reasons: • Help stabilize the economy

• Promote economic growth– Raise Gross Domestic

Product (GDP)» Total output of goods

and services produced in the USA

Organization of the U.S. Economy

• We have a free enterprise economy– Business can be conducted freely. • Little to no government interference.

• “Laissez-faire” = hands off. – Term used to explain free enterprise capitalism.

– Free enterprise economy• Dependent on a market in which goods and services

are exchanged openly and freely!!

Free-Enterprise System

• Based on 5 main individual rights:

1. To own private property

2. To make individual choices

3. To engage in economic competition

4. To make decisions based on self-interest5. To participate in the economy with limited

government involvement and regulation.

Why are free enterprise economies so good?

• Drives competition– If you make a product, you have to make it good

enough to compete with everyone else.• This helps keep prices low.

• This also allows companies to focus on what the consumer wants. – Consumer = people who buy things.

Government and the Economy

• What is the government’s role in the economy? – Republicans • Government has no role! • They need to stay out!

– Democrats• Government needs to help stabilize the economy to

keep it from going into a recession. – Economic downturns that turn into depressions.

2 Goals of Economic Stabilization

1. Make sure everyone capable of work has a job. • A good unemployment rate = 5% or less. • Why does everyone need to work?

– You need to make money to spend money! » If you are out of work, you will save all of the money

you have instead of buying things.

2. Keep inflation low. 1. The general rise in prices that often accompanies

economic booms.

How does inflation keep an economy from working?

• If the price of goods goes up, people stop buying things. – Even people with lots of

money.

– Example:

• 2000 Ford F-150– $28,500

• 2009 Ford F-150– $19,500

Tools for Economic Stabilization• Fiscal Policy– A set of government spending, taxing, and borrowing

policies used to achieve desired levels of economic performance.

• Monetary Policy– Set of procedures designed to regulate the economy

by controlling:• amount of money in circulation• Level of interest rates

2 Goals of Fiscal Policy• Growth of U.S. Economy

– How? • Increase federal spending

• Lower taxes on citizens

– Theory:• Businesses will expand and hire

more people

– Hopeful result:• Increased growth in the economy

• Lower unemployment

• Economy Stabilization– How?

• Increase citizens Taxes

• Lower government spending

– Theory: • Increased taxes will force

people to save money

• Keep prices low.

– Hopeful result: • low inflation rates

• Stable growth in the economy

2009 American Recovery and Reinvestment Act

• Pres. Obama signed this into law at beginning of term in office.

– Intended to stimulate American economy • Keep us from going into

recession.

• Cost= $787,000,000,000!

What did the American Recovery and Reinvestment Act do?

• Expansion of unemployment benefits– Now covered for 9

months

– Increase spending in• Education• health care• Infrastructure

– Including the energy sector

How is it working so far?