The Federal Government’s Role in Today’s Economy



The Federal Government’s Role in Today’s Economy Review III

The __________ government has the ability to influence the American economy today. It bases its decisions regarding economic policy on such economic indicators as _________ ____________ ___________ (GDP), exchange rates, inflation, and _______________ rates. GDP is the _______ market ________ of all final goods and services produced in a country in a given year. It is equal to total ___________ investment and government _________, plus the value of ________, minus the value of __________. In short, one may define GDP as the market value of the _______ and ___________ produced by a country. Exchange rates are the value of the American ________ relative to other world currencies. In other words, the dollar’s value floats on the international ___________ market according to the basic economic principle of supply and demand. If the _________ of dollars for sale is greater than the demand to buy dollars on the world currency market, then the value of the dollar drops in comparison to other world currencies. On the other hand, if the _________ for dollars is greater than the supply, then the dollar’s value increases in comparison to other international currencies, like the Japanese Yen and the European Euro. Inflation is the economic condition, when prices __________ and the dollar buys less.

A healthy economy is one that has full _____________ and low ____________. The federal government tries to maintain a healthy economy in the United States by using ____________ policy and ________ policy. The _________ _________ controls monetary policy, while the _____________ and __________ control fiscal policy. ____________ policy is a central bank’s actions to influence the availability and cost of money and credit, as a means of helping to promote national economic goals. In the United States monetary policy refers to __________ __________ actions to influence the money supply and the availability of credit in the American economy. The Federal Reserve is the _________ bank of the United States. Since interest rates determine the availability of credit, the Federal Reserve ______ interest rates, if it believes the American economy is slowing down. Lower interest rates stimulate or fuel economic growth, because lower interest rates encourage ____________. Greater borrowing results in an increase in the nation’s _________ supply, greater __________ spending, an increase in _________, the hiring of more workers, and economic expansion.

In contrast, if the Federal Reserve believes the American economy is overheating and thereby causing __________, then it raises interest rates. To slow down inflation the Federal Reserve ________ interest rates. ________ interest rates result in less borrowing, a reduction in the nation’s ________ ________, less consumer spending, a decrease in demand, _______ prices, a drop in the rate of __________, and a contraction or decrease in economic growth.

Fiscal policy is __________ and ___________ actions taken by the President and Congress to influence the American economy. If the economy is slowing down, then under fiscal policy the ____________ and __________ may reduce taxes and increase federal spending. Cutting _______ enables the government to stimulate economic growth, because the government gives the American consumer _______ money to spend, which should thereby increase _________ for goods and services in the nation’s economy. Likewise, by increasing federal _________, Congress and the President increase demand for whatever goods and services the government buys. The increased demand created by either action, cutting taxes or increasing federal spending, should encourage business to _____ more workers to expand production. Hiring additional workers will reduce ____________ and thereby stimulate economic _________.

In reverse, if the President and Congress believe the American economy is overheating and thereby causing inflation, they may _________ taxes or _________ federal spending. By raising taxes, the government takes away money from the American ___________. When the American consumer has less money to spend, demand for ________ and __________ in the economy decreases. A drop in demand should result in lower ______ and thereby a reduction in the rate of ___________. Cutting federal ___________ is the second way Congress and the President may use fiscal policy to slow down inflation. A reduction in government spending also decreases the demand for ________ and __________. If demand drops and supply stays the same, then business should cut _______, which will in turn lower __________. Together the President and Congress make _______ policy decisions. They try to regulate the American _________ by deciding the levels of government spending and taxation.

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