ECON CH 3-2 GROWTH AND STABILITY

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Examine the introduction above. Explain what you expect to learn in this lesson. Also, review the vocabulary words and look for them as we go through this lesson. You will be tested on them later.

America’s economy is big—very big. It consists of roughly 108 million households of about 288 million people who work at some 137 million jobs and earn more than $8 trillion a year. They make savings deposits of $28 billion or so in about 71,000 banks. They buy close to 6.5 million homes and 17 million automobiles a year.

The economy goes through regular periods of recession and recovery. Some recoveries take longer than others because of bad government policies, but over time the total economy in the U.S. tends to trend up, or improve.

In Washington, armies of economists use the latest computer and other technologies to try to predict whether this massive economy will grow or shrink. Economic policymakers pull in the reins when the economy bolts at breakneck speed, and attempt to kick start it when it gets slow and unproductive.

Though the American economy goes through regular cycles what is the over-all trend of the economy?

a.	The American economy improves	c.	The American economy declines
b.	The American economy remains stagnant	d.	The economy trends up sometimes and trends down sometimes

Government economists use various tools to ensure that the economy

a.	always grows as much and as fast as it can	c.	grows at a moderate steady pace
b.	always runs at a slow pace	d.	remains static and with no growth

Tracking Business Cycles
In this section we’ll examine how the United States government affects macroeconomic
trends. Macroeconomics is the study of the behavior and decision making of entire economies. This branch of economics examines major trends for the economy as a whole. Microeconomics, in contrast, is the study of the economic behavior and decision making of small units, such as individuals, families, households, and businesses. (Macro means “large,” while micro means “small.”)

One way economists measure economic well-being is by calculating the nation’s
gross domestic product (GDP), the total value of all final goods and services produced in an economy. Economists follow the
country’s GDP and other key statistics to
predict business cycles. A business cycle is
a period of macroeconomic expansion
followed by a period of contraction, or decline. These economic cycles are major fluctuations, unlike the day-to-day ups and downs of the stock market. We are always at some point in the business cycle. Cycles may last less than a year or continue for many years.

Free enterprise systems are subject to
business cycles because economic decisions
about factors such as prices, production,
and consumption are made by individuals
and businesses acting in their own self interest. In America’s free enterprise
system, the government plays a role in attempting to prevent wild swings in economic behavior.

Where we are in a given business cycle
affects our lives every day. If the economy
doesn’t create enough jobs, high school
graduates have trouble finding work. If
prices rise, but incomes don’t, our ability to
buy what we need declines.

What is macroeconomics?

a.	The study of household incomes	c.	The study of major trends in the overall economy
b.	The study of corporate incomes	d.	The study of minor shifts in economic behavior of individuals

What is microeconomics?

a.	The study of microscopic changes in the overall economy	c.	The study of trends in the supply of money in circulation
b.	The study of small units of the economy, such as small businesses	d.	The study of the banking system

If you wanted to compare the size of the economy in the United States and China, what economic tool would you use.

a.	The comparative value of goods over services in each country	c.	The amount of economic freedom in both countries
b.	The size of their entitlement spending	d.	The GDP’s of both countries (Gross Domestic Products)

You graduate from high school when the business cycle is trending down. You have no intention of going to college. What effect with the business cycle have on your life?

a.	Because business is expanding you will most likely find a good job.	c.	You will most likely decide not to go to college because business is bad
b.	Because business is declining you may have trouble finding a job	d.	The business cycle has little effect on people’s lives.

In a free market economy individuals and businesses decide what and how much will be produced. Since individual behavior changes over time, what effect does this have on the over-all market?

a.	Creates steady predictable behavior on the part of consumers	c.	Creates business cycles
b.	Causes wasteful spending	d.	Does not satisfy individual demands for goods and services

Promoting Economic Strength
Because the market is vulnerable to business cycles, the government creates public policies that aim to stabilize the economy. Policymakers pursue three main outcomes as they seek to stabilize the economy: high employment, steady growth, and stable prices.

Employment One aim of federal economic policy is to provide jobs for everyone who is able to work. In the United States, many economists consider an unemployment rate of between 4 percent and 6 percent to be desirable. In the last half of the twentieth century, the jobless rate ranged between 3 percent and 11 percent.	Growth Part of the American Dream has always been for each generation to enjoy a higher standard of living than that of previous generations. For each generation to do better, the economy must grow to provide additional goods and services to succeeding generations. GDP is a measure of such growth.

Why does the government feel the need to get involved in the economy in response to business cycles?

a.	To make the ups and downs of the business cycles even more dramatic	c.	To stabilize the economy
b.	To make the economy lean toward socialism	d.	To provide a safety net for the poor

10.

Which item below is NOT one of the goals the government pursues in order to stabilize the economy.

a.	high employment	c.	stable prices
b.	social safety net	d.	steady growth

11.

What is considered a good unemployment rate?

a.	1% to 3%	c.	0% to 15%
b.	10% to 18%	d.	4% to 6%

12.

Your parents want you to have a better life than they had. What must the economy do in order for that to happen?

a.	grow	c.	have no unemployment
b.	avoid business cycles	d.	make it possible for every person to go to college

Growth
Part of the American Dream has always been for each generation to enjoy a higher standard of living than that of previous generations. For each generation to do better, the economy must grow to provide additional goods and services to succeeding generations. GDP is a measure of such growth.

U.S. economic growth soared in the 1990s but slowed somewhat in the 2000s.

13.

How does the growth of GDP reflect the strengths of the free enterprise system?

a.	It shows how much the economy has grown over time	c.	Is show the value of the U.S. dollar over time
b.	It is a reflection of the inflation rate	d.	It is a reflection of unemployment

14.

What does GDP stand for?

a.	General Department Demographics	c.	General Deflation Diagnosis
b.	Gross Domestic Product	d.	Gross Demand Profits

15.

What does GDP do?

a.	It shows how much goods, demand, and sectors of the economy has increased over time.	c.	It measures the inflation rate as a reflection of the total health of the economy
b.	It measures Graphically, the Demand of the Public	d.	It measures the total output of all goods and services produced by an economy

Stability
Another macroeconomic task that the
government pursues is keeping the economy stable and secure. Stability gives consumers, producers, and investors confidence in the economy and in our financial institutions, promoting economic freedom and growth.

One indicator of economic stability is general price levels. The government’s aim is to help prevent sudden, drastic shifts in prices. A surge in overall prices puts a strain on consumers, especially people on fixed incomes. When prices sink, producers and consumers feel the pain. A jump in the price of milk, for example, is hard on families with children, while a plunge in milk prices hurts dairy farmers. In either direction, major fluctuations in price levels can cause a macroeconomic chain reaction that policymakers seek to avoid.

Another sign of economic stability is the health of the nation’s financial institutions. None of us wants to go to the bank and
find it boarded up and empty. When we make a bank deposit or a stock purchase, we want to know that our money will be protected from fraud or mismanagement and shielded from the damaging effects of sudden economic downturns.

To provide such assurances, the federal
government monitors and regulates American banks and other financial institutions. It produces hundreds of regulations, and it has the power to enforce them. Federal banking regulations protect bank deposits and retirees’ pensions. Federal regulators investigate fraud and manage interest rates and the flow of money through the economy. You’ll learn more about these functions in later chapters.

Economic Citizenship
Achieving macroeconomic growth and
stability is not easy. Through the way it
spends money and influences other macroeconomic factors such as interest rates, the government helps to compensate for the typical swings of the business cycle in our economy.

Do you expect your generation to have a higher standard of living than that of past generations? As a voter, your elective
choices will help guide government
economic policy. That’s why it’s more
important than ever for American citizens
to understand the macroeconomic processes
that shape our futures.

16.

Why is it important for the government to promote stability in the economy.

a.	So the people will not elect too many Republicans	c.	So people, businesses and governments will have faith in the economy.
b.	So the people will not elect too many Democrats	d.	So the government can collect more taxes.

17.

Why are stable prices important to old people and families.?

a.	Sudden decreases can place economic hardships on people who have fixed incomes that do not increase with inflation	c.	Stable prices mean that people on pensions and welfare may not get a “cost of living” increase in their pensions
b.	Sudden increases can place economic hardships on people who have fixed incomes that do not increase with inflation	d.	Price increases are good because farmers and food manufacturers will make more and better products available.

18.

Why does the government make so many banking regulations?

a.	To regulate trade help promote American exports	c.	To protect rich people who own the banks
b.	To increase GDP	d.	To protect deposits and prevent fraud

19.

It is it important for American citizens to understand the macroeconomic processes that shape our futures.so we can become intelligent voters and ensure a higher standard of living

true

false

20.

What are two methods used by the government to prevent drastic swings in the business cycle? (pick 2)

a.	regulating interest rates	c.	controlling news about the economy
b.	providing a safety net for the poor	d.	selective government spending

Technology and Productivity
The American economy maintains a far higher standard of living, in terms of GDP, than most of the world. You’ve read that one way to preserve that high standard is by increasing productivity—shifting the production possibilities frontier outward. How do we do that? One way is through the American work ethic, a commitment to the value of work and purposeful activity. Another way to increase productivity is through improved technology.

Technological Progress
Technology is the process used to produce a good or service. Improvements in technology
allow an economy to produce more
output from the same or a smaller quantity
of inputs, or resources. Technological
progress allows the United States economy
to operate more efficiently and productively,
increasing GDP and giving U.S. businesses a
competitive advantage in the world.

American history is full of innovations that improved productivity. Thomas Edison’s invention of the light bulb in 1879 made possible a longer workday. From weaving looms to tractors to computers, machines have allowed us to generate more goods in a shorter amount of time with fewer raw materials.

In addition, although innovation makes
some production processes and workers out of- date, or obsolete, these resources can be
used in other ways. For example, old industrial buildings can be converted into stores or apartments. Old machines can be recycled and used to produce new machines.

21.

How does technology help to improve the economy?

a.	by improving the environment	c.	by eliminating business cycles
b.	by shifting the production possibilities frontier outward	d.	by increasing savings and lowering interest rates

22.

Improvements in technology

a.	make geeks more attractive	c.	make the economy more productive
b.	takes money from the poor and gives it to the rich	d.	make the economy more fair to the poor

23.

When they invented the automobile, thousands of people who worked in the horse and carriage industry were put out of work. How could that possibly have helped the economy?

a.	It gave the horse and carriage people a chance to go on unemployment	c.	People who worked with horses tended to be lazy and should have been put out of work.
b.	Fewer workers were needed in the auto industry	d.	Eventually the horse and carriage workers went to work in the auto industry.

The Government’s Role
Inventions are the engine of the free enterprise system. They help us to build “more-better-faster,” thus giving consumers more economic choices. Recognizing the need for innovation to maintain America’s technological advantage, the government provides incentives for innovation.

Federal agencies fund scores of research and development projects at universities. The Morrill Acts of 1862 and 1890 created so-called land-grant colleges that received federal land and money to pursue the study of “agriculture and the mechanical arts.” Land-grant schools from the Massachusetts Institute of Technology to Texas A&M University have been powerhouses of innovation.

The government’s own research institutions also produce a steady stream of new technologies that make their way into the marketplace. Probably the best-known example of such an institution is the National Aeronautics and Space Administration (NASA). Technology created by NASA to blast humans into space and to explore distant planets has produced amazing “spinoffs,” products with commercial uses. NASA spinoffs include everything from a muscle stimulator for people with paralysis to a scanner that allows firefighters to see “invisible flames” given off by alcohol or hydrogen fires.

The government also plays a role in innovation by offering inventors the possibility of making huge profits in the free market. It does so by granting patents and copyrights.

A U.S. patent gives the inventor of a new product the exclusive right to produce and sell it for 20 years. A copyright grants an author exclusive rights to publish and sell his or her creative works.

The Framers of the Constitution foresaw the economic need to create incentives for innovation. Congressional authority to issue patents and copyrights is stated in Article 1, Section 8 of the Constitution. It gives Congress the power to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

24.

How does the government promote inventions and technology?

a.	By providing incentives	c.	By increasing competiton among technology companies
b.	By insuring the technology companies always make a profit	d.	By decreasing competition among technology companies

25.

What group of people was the Morrill Acts of 1862 designed to help?

a.	teachers	c.	farmers and mechanics
b.	auto and airplane mechanics	d.	doctors and nurses

26.

Television was invented by RCA as a result of its work in radar during the war. NASA invented teflon ( the coating in frying pans) because it needed a heat shield for the space shuttle. We call these products

a.	spin-offs	c.	unintended consequences
b.	military objectives	d.	pure science

27.

What do patents and copyrights do?

a.	allow the government to use new inventions	c.	ensure that taxes will be paid on time
b.	helped the government to create new industries	d.	protect the intellectual property of the inventors

28.

Which branch of the U.S. government is given the authority to issue patents and copyrights by the Constitution?

a.	Congress	c.	Supreme Court
b.	President	d.	Commerce Department

a.	microeconomics	d.	gross domestic product (GDP)
b.	business cycle	e.	macroeconomics
c.	technology	f.	induswork ethic

29.

the total value of all final goods and services produced in a particular economy

30.

the process used to produce a good or service

31.

the study of the behavior and decision making of entire economies

32.

a commitment to the value of work and purposeful activity

33.

a period of macroeconomic expansion followed by a period of contraction

34.

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses