policy is adopted: the government will decrease spending or increase taxes, or both.Because such contractionary measures reduce spending by businesses andconsumers, prices come down and inflation eases.The National DebtIf, in any given year, the government takes in more money (through taxes) than itspends on goods and services (for things such as defense, transportation, and socialservices), the result is a budgetsurplus. If, on the other hand, the governmentspends more than it takes in, we have a budgetdeficit(which the government paysoff by borrowing through the issuance of Treasury bonds). Historically, deficitshave occurred much more often than surpluses; typically, the government spendsmore than it takes in. Consequently, the U.S. government now has a totalnationaldebt46of more than $14trillion.As you can see inFigure 1.13 "The U.S. National Debt, 1940–2010", this number hasrisen dramatically in the last sixty-five years. The significant jump that starts in the1980s reflects several factors: a big increase in government spending (especially ondefense), a substantial rise in interest payments on the debt, and lower tax rates. Asof this writing, your share is $46,146.21. If you want to see what the national debt istoday—and what your current share is—go on the Web to the U.S. National DebtClock ().46. Total amount of money owedby the federal government.Chapter 1 The Foundations of Business1.7 Government’s Role in Managing the Economy45
Figure 1.13The U.S. National Debt, 1940–2010Macroeconomics and MicroeconomicsIn the preceding discussion, we’ve touched on two main areas in the field ofeconomics: (1)macroeconomics, or the study of the economy as a whole, and (2)microeconomics, or the study of the economic choices made by individual consumersor businesses. Macroeconomics examines the economy-wide effect of inflation,while microeconomics considers such decisions as the price you’re willing to pay togo to college. Macroeconomics investigates overall trends in imports and exports,while microeconomics explains the price that teenagers are willing to pay forconcert tickets. Though they are often regarded as separate branches of economics,we can gain a richer understanding of the economy by studying issues from bothperspectives. As we’ve seen in this chapter, for instance, you can better understandthe overall level of activity in an economy (a macro issue) through anunderstanding of supply and demand (a micro issue).Chapter 1 The Foundations of Business1.7 Government’s Role in Managing the Economy46
KEY TAKEAWAYS•The U.S. government uses two types of policies—monetary policy andfiscal policy—to influence economic performance. Both have the samepurpose: to help the economy achieve growth, full employment, andprice stability.•Monetary policyis used to control the money supply and interest rates.
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