3.00 American Free Enterprise and U.S. Government Involvement

How is mandatory and discretionary spending different? List some examples of expenditures that are found in each category.

Mandatory spending is expenditures that are required by law. Discretionary spending is money that the government can make decisions about how to spend. Examples of mandatory spending include Social Security and Medicare. Examples of discretionary spending include education and research.

List three examples of public goods.

Possible examples: transportation, recreation areas, dams, and bridges

Describe the effects of the national debt on the economy.

When there is a large national debt, the government has less money to help stimulate the economy and less money to spend on programs that are designed to help the needy. A large national debt can also lower the confidence that investors and other countries have in a country's economy.

Define expansionary policies and contractionary policies. How are they different?

Expansionary policies expand the economy. Contractionary ones slow down the economy. Expansionary policies involve increasing government spending and decreasing taxes. Contractionary policies involve decreasing government spending and increasing taxes.

List contributions of three of the entrepreneurs discussed in this section.

Answers will vary but examples are: Edison (light bulb and telegraph), Bell (telephone), Duryea Brothers (gas-powered automobile), Ford (assembly line), Goldmark (color TV), Yang (Internet search engine), Gates (universal operating system for computers), Dell (e-commerce methods)

List the five main components of the Federal Reserve.

Board of Governors, District Reserve Banks, Member Banks, Federal Advisory Council, Federal Open Market Committe

List government programs that redistribute income among the population.

Cash Transfers (Social Security, Unemployment Insurance, Workers' Compensation, Temporary Assistance for Needy Families); In-Kind Benefits (food stamps, free food, low cost housing); Medical Assistance (Medicare, Medicaid); Education

How do citizens benefit from the collection of taxes?

Citizens benefit because the government provides programs that assist those in need. By doing so, people may be more able to support themselves and maintain healthy lifestyles as well as purchase items needed for survival.

What are the benefits of the American Free Enterprise System?

Explain the importance of Adam Smith's and John Maynard Keynes' economic philosophy on the American Free Enterprise System.

Explain the series of steps that comprise the budget process of the U.S. Government.

First, proposals for money are given to the Office of Management and Budget (OMB). Then the OMB works with the President to draw up the budget, taking into account the requests from all the agencies for funding. The President then presents the budget to Congress. Then Congress studies the budget and makes changes. Congress then presents bills to the President for his approval. If he vetoes them, Congress can try to override the vetoes with a two-thirds majority vote. But if this cannot be done, the President and Congress must work out a budget that both sides agree to.

How does the government protect the economic rights of people in the American Free Enterprise System

Protection of Consumers: The government requires labels on products, such as nutritional labels on food products, warnings on products that could cause serious injury, and the collection of safety information on products. Occupational Health and Safety: The government has laws that protect people on the job and requires employers to notify employees of possibly dangerous work conditions. Environmental Protection: The government has passed laws protecting the environment and citizens from unsafe business practices that could influence the health and welfare of the environment and its citizens.

Explain the importance of Adam Smith's and John Maynard Keynes' economic philosophy on the American Free Enterprise System.

Smith: He emphasized a very strong "hands off" outlook regarding the government in the market economy. Therefore, the concept of limited government is very common in the American economy. Keynes: He saw the government as taking on the role of "big spender." This philosophy helped bring the U.S. out of the Great Depression and is one that the government follows when it feels it must influence the economy. Government spending often boosts the economy by providing jobs, which in turn boosts the economy.

Explain the tools the Federal Reserve uses to implement monetary policy.

The Fed encourages banks to make loans so people have more money to buy goods and boost economic activity. It does this by adjusting the amount that the banks are required to keep on reserve. It also adjusts the discount rate, which is the interest rate banks charge to loan money. Banks will sometimes lend money from the Fed if the amount of cash they have on hand is in danger of falling below the RRR. If the Fed wants to increase money in circulation, it might reduce the discount rate. Increasing the discount rate will discourage banks from lending their reserves because the banks will not wish to loan money from the Fed at the higher interest rate to maintain the reserve requirement. The most widely used tool by the Fed is open market operations, which refers to the purchasing and selling of government securities (bonds) to adjust the money supply. If the Federal Open Market Committee (FOMC) wishes to increase the amount of money in circulation, it will authorize the Federal Reserve Bank of New York to buy government securities on the open market. If the FOMC wishes to decrease the level of money in circulation, it sells bonds back to the bond sellers.

Describe the roles of the Federal Reserve.

The Federal Reserve has the following roles: Serves as the government's bank - It issues checks, sells bonds and makes interest payments, handles the checking account of the national government, distributes paper money, takes old bills out of circulation, and even lends money to foreign countries. Serves other banks - It provides check clearing services, loans money to other banks, monitors reserves held by banks, enforces truth in lending laws, and oversees bank mergers. Monitors banking system - It conducts bank evaluations. Regulates money supply - Its goal is to make sure that enough money remains in circulation to meet the needs of the people. It also stabilizes the economy by keeping the money supply stable.

Why does the government collect taxes?

The government collects taxes to fund programs that improve the general welfare of its citizens. It also collects taxes to pay for its day-to-day operations.

Why does the government want more entrepreneurs and better technology in the economy?

The government encourages these things because both stimulate economic activity, creating jobs and expanding markets and availability of goods.

How does U.S. fiscal policy help the economy?

The government often uses fiscal policies to stabilize the economy. The government uses two "tools" known as taxation and spending as ways to accomplish this.

How does monetary policy work?

The monetary policies carried out by the Federal Reserve adjust the amount of money circulating in the economy. This in turn will affect interest rates. Interest rates then influence how much is being spent in the economy, as well as how much is invested.

What are the basic principles of the American Free Enterprise System?

The principles are profit motive, voluntary exchange, private property rights, competition, and self-interest.