Summary and Main Ideas
Summary
Until the Great Depression of the 1930s, the U.S. government took a laissez-faire or hands-off approach to economic policy, assuming that if left to itself, the economy would go through cycles of boom and bust, but would remain healthy overall. Keynesian economic policies, with their emphasis on government spending to increase consumer consumption, helped raise the country out of the Depression.
The goal of federal fiscal policy is to have a balanced budget, in which expenditures and revenues match up. More frequently, the budget has a deficit, a gap between expenditures and revenues. It is very difficult to reduce the budget, which consists of mandatory and discretionary spending, but no one really wants to raise revenue by raising taxes. One way monetary policies can change the economy is through the level of interest rates. The Federal Reserve Board sets these rates and thus guiding monetary policy in the United States.
Practice Questions
- When times are tough economically, what can the government do to get the economy moving again?
- What might indicate that a government is passing the policies the country needs?
- If you had to define the poverty line, what would you expect people to be able to afford just above that line? For those below that line, what programs should the government offer to improve quality of life?
- What is the proper role of the government in regulating the private sector so people are protected from unfair or dangerous business practices? Why?
- Is it realistic to expect the U.S. government to balance its budget? Why or why not?
- What in your view is the most important policy issue facing the United States? Why is it important and which specific problems need to be solved?
- What are some suggested solutions to the anticipated Social Security shortfall? Why haven’t these solutions tended to gain support?
- Whose role is more important in a democracy, the policy advocate’s or the policy analyst’s? Why?
- Which stage of the policy progress is the most important and why?
Sample Answer:
1. A Keynesian approach would recommend deficit spending to stimulate the economy. Supply-side economists would advocate cutting taxes to get more money flowing in the economy.
Glossary
deficit: the annual amount by which expenditures are greater than revenues
discretionary spending: government spending that Congress must pass legislation to authorize each year
excise taxes: taxes applied to specific goods or services as a source of revenue
Keynesian economics: an economic policy based on the idea that economic growth is closely tied to the ability of individuals to consume goods
laissez-faire: an economic policy that assumes the key to economic growth and development is for the government to allow private markets to operate efficiently without interference
mandatory spending: government spending earmarked for entitlement programs guaranteeing support to those who meet certain qualifications
progressive tax: a tax that tends to increase the effective tax rate as the wealth or income of the tax payer increases
recession: a temporary contraction of the economy in which there is no economic growth for two consecutive quarters
regressive tax: a tax applied at a lower overall rate as individuals’ income rises
supply-side economics: an economic policy that assumes economic growth is largely a function of a country’s productive capacity
This lesson is part of:
American Domestic Policy