Notes

What are the basic principles of the American Free Enterprise System?
Answer: The principles are profit motive, voluntary exchange, private property rights, competition, and self-interest.

What are the benefits of the American Free Enterprise System?
Answer: The benefits are government protection, economic freedom, variety of goods, responsive prices, investment opportunities, and government help for the economy.

Explain the importance of the philosophies of Adam Smith and John Maynard Keynes on the American Free Enterprise System.
Answer: Smith: He emphasized a very strong "hands off" sentiment regarding the government in his writings of the market economy. Therefore, the concept of limited government is very prevalent 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.

How does the government protect the economic rights of people in the American Free Enterprise System?
Answer:
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 collecting 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 potentially 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.
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List government programs that redistribute income among the population.
Answer: Cash Transfers (Social Security, Unemployment Insurance, Workmen's Compensation, Temporary Assistance for Needy Families); In-Kind Benefits (food stamps, free food, low cost housing); Medical Assistance (Medicare, Medicaid); Education

List three examples of public goods.
Answer: Possible examples: transportation, recreation areas, dams, and bridges

Why does the government want more entrepreneurs and better technology in the economy?
Answer: The government encourages these things because both stimulate economic activity, creating jobs and expanding markets and availability of goods.

List contributions of three of the entrepreneurs discussed in this section.
Answer: 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)
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Why does the government collect taxes?
Answer: The government collects taxes to fund programs that help improve the general welfare of its citizens. It also collects taxes to pay for the day-to-day operations of the government.

How do citizens benefit from the collection of taxes?
Answer: Citizens benefit because the government provides a variety of programs that assist those who are in need. By doing so, people are able to support themselves and maintain healthy lifestyles, and they are able to purchase the items that they need for survival. Everyone benefits because society runs much more smoothly and is much healthier.

How is mandatory and discretionary spending different? List some examples of expenditures that are found in each category.
Answer: Mandatory spending is spending that is required by law. Discretionary is money that the government can make decisions about how to spend. Mandatory spending: Social Security, Medicare; Discretionary: education, research
-------------------------------------------------------------------------------------------------------------------------------------List the five main components of the Federal Reserve.
Answer: Board of Governors, District Reserve Banks, Member Banks, Federal Advisory Council, Federal Open Market Committee

Describe the roles of the Federal Reserve.
Answer: The Federal Reserve has the following roles:
Serves as government's bank - It issues checks, sells bonds and makes interest payments, handles checking account of the national government, issues paper money, and takes old bills out of circulation.
Serves other banks - 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 - 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.

Explain the tools the Federal Reserve uses to implement monetary policy.
Answer: 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 the Fed charges to banks that loan money from the Fed. 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 in order to maintain the reserve requirement. The most widely tool used 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.

How does monetary policy work?
Answer: 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.