The Role of Government: Contributing to Economic Stability
Another important role that the U.S. government plays in mixed capitalism is to contributing to the country's economic stability. An economy never stays exactly the same size. Instead, in grows and contracts in response to the combined effects of such factors as technological breakthroughs, changes in investment patterns, shifts in consumer attitudes, would events, and basic economic forces. These up-and-down swings are know as the business cycle. Although such swings are natural and to some degree predictable, they cause hardship. During periods of downward swing, or recession, consumers buy less, and factories produce less, so companies must lay off workers, who is turn buy less--and so on.
In an attempt to avoid such problems and to foster economic stability, the government can adjust the tax system, the interest rates, and the total amount of money circulating in our economy. These government actions have two facets: Fiscal policy involves changes in the government's revenues and expenditures to stimulate or dampen the economy. Monetary policy involves adjustments to the nation's money supply by increasing or controlled primarily by the Federal Reserve Board, a group of appointed government officials who oversee the country's central banking system.
Inflation and Disinflation Inflation is as steady rise in the prices of goods and services throughout the economy. When prices in the overall economy decline, economies use the term disinflation. Although prices in the overall economy tend to increase year after year, not all industries and product categories necessarily follow this trend. In the electronics industry, for instance, technological advances have the opposite effect--prices tend to drop as production increases.
One way economists measure the rate of inflation is by comparing the change in prices of goods and services over a period of time. The consumer price index (CPI) is a tool used to measure this price change. Although far from a perfect measure, the CPI keeps track of the prices of a representative basket of goods and services (like clothing, food, housing, and utilities) and applies weights to specific items to account for their relative importance in the market. The problem with this measure is that the representative basket of goods may not accurately represent the prices and consumption patterns of the area in which you live. In addition, the mix in this basket may not include new innovations that become key economic players in the future. Nonetheless, many industries use the CPI to adjust rent increases and employees' wages to keep them in line with the pace of inflation.
Employment and Unemployment When the U.S. government is strong, it has historically been able to employ about 95 percent of the people who are willing and able to work. During downturns in the business cycle, however, unemployment may become a major economic and social problem. The most extreme case in this century cam during the Great Depression of the 1930s, when unemployment affected as much as 25 percent of the labor force.
Reference
In an attempt to avoid such problems and to foster economic stability, the government can adjust the tax system, the interest rates, and the total amount of money circulating in our economy. These government actions have two facets: Fiscal policy involves changes in the government's revenues and expenditures to stimulate or dampen the economy. Monetary policy involves adjustments to the nation's money supply by increasing or controlled primarily by the Federal Reserve Board, a group of appointed government officials who oversee the country's central banking system.
Inflation and Disinflation Inflation is as steady rise in the prices of goods and services throughout the economy. When prices in the overall economy decline, economies use the term disinflation. Although prices in the overall economy tend to increase year after year, not all industries and product categories necessarily follow this trend. In the electronics industry, for instance, technological advances have the opposite effect--prices tend to drop as production increases.
One way economists measure the rate of inflation is by comparing the change in prices of goods and services over a period of time. The consumer price index (CPI) is a tool used to measure this price change. Although far from a perfect measure, the CPI keeps track of the prices of a representative basket of goods and services (like clothing, food, housing, and utilities) and applies weights to specific items to account for their relative importance in the market. The problem with this measure is that the representative basket of goods may not accurately represent the prices and consumption patterns of the area in which you live. In addition, the mix in this basket may not include new innovations that become key economic players in the future. Nonetheless, many industries use the CPI to adjust rent increases and employees' wages to keep them in line with the pace of inflation.
Employment and Unemployment When the U.S. government is strong, it has historically been able to employ about 95 percent of the people who are willing and able to work. During downturns in the business cycle, however, unemployment may become a major economic and social problem. The most extreme case in this century cam during the Great Depression of the 1930s, when unemployment affected as much as 25 percent of the labor force.
Reference
- Michael H. Mescon, Courtland L. Bovée, John V. Thill, Business Today, 9th edition, Prentice Hall, 1999
