Fatima Wood, Nicole Schultz, and Kaito Singleton
AP Gov’t, 5th
Unit 8 Review
For the purpose of promoting economic efficiency and equity, U.S. government imposes restraints on
activity/business through regulations
U.S. government helps private interests/companies achieve their economic goals through promotion (businesses
benefit from tax breaks, loans, and governmental promotional efforts)
Through fiscal policy (taxing and spending decisions) the government tries to maintain a level of economic supply
and demand that will keep up economic prosperity
Through monetary policy (money supply decisions) the government uses the Federal Reserve System (the Fed)
to maintain a stable level of inflation that is consistent with a controllable economic growth
“Government as Regulator of the Economy”
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Laissez-faire economics: private firms should be free to make their own production and distribution
decisions (Adam Smith and The Wealth of Nations).
o Admitted that laissez-faire had limits; things like roadways are natural monopolies and are better
left in government hands. Everything else should be mainly private hands.
o Laissez-faire worked in the U.S. worked until the Depression when government finally assumed a
greater role.
o Today, U.S. is a mixed economy (economy works mainly through private transactions, but
government has also taken a substantial role through regulation, promotion, etc)
 Example: government regulates the stock market through the Securities and Exchange
Commission (SEC) that requires publicly traded companies to disclose their assets to
investors. Government even owns some industry like the Tennessee Valley Authority
(electricity production)
U.S. companies must operate within the limit of government regulation in order to promote economic
efficiency and equity
o Efficiency: fulfillment of as many of society’s needs as possible at the cost of as few of its resources
as possible. The greater the output for a given input, the more efficient the process
 Examples: Preventing trade restrictions, reducing restrictions on business that cannot be
justified on a coast-benefit basis
o Equity: When the outcome of an economic transaction is fair to each party
 Requiring firms to bargain in good faith with labor; protecting consumers in their purchases
and workers with safety and health
o “Economic efficiency results when the output
of goods and services is the highest possible
given the amount of input (such as labor and
material) that is used to produce it” (We The
People, Page 504)
Promoting competition— Classical economists argue
that free market is the best way to achieve efficiency.
It not only lowers prices which will attract customers,
but will also make other less-efficient producers cut
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their production costs in order to keep up with their competitors, or face the loss of customers.
o Monopolies on a particular product by one producer—or conspiring with other producers—can fix
a price that consumers have no choice but to pay in order to get that product (price fixing prevalent
in late 1800s—time of monopolies)
o Goal or regulatory activities like the Interstate Commerce Commission (regulating railroad
prices/shipping rates) is to improve efficiency by restoring market competition/placing limit on
what monopolies can charge for goods and services.
o At the same time, government also allows concentrated ownership in certain industries (like
oil/automobiles) since capital costs are so high that small firms can’t hope to compete
o American companies not only compete domestically, but also internationally (Chrysler, GMC vs.
Honda, BMW)
Economic Inefficiencies occur when businesses/consumers fail to pay the full costs of resources used in
production (such as cost to society/environment) unpaid costs are called externalities
“Fiscal Policy as an Economic Tool”
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Government’s efforts to maintain a thriving
economy occurs partially through its taxing
and spending decisions fiscal policy.
Government can slow or stimulate economy
through changes in levels of spending and
taxation.
o Keynes suggested that if government
pumps money into economy, it can
stimulate consumer spending which in
turn stimulates production/business growth. Must be used in discretion; excessive government
spending results in a budget deficit: federal government spends more in a year than it receives in
tax and other revenues. This shortfall increase national debt (total cumulative amount fed. gov’t
owes its creditors). Interest on the debt must be paid, which then spends more taxpayer money.
“Monetary Policy as an Economic Tool”
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Monetary policy: based on adjustments in the
amount of money in circulation; Monetarists are
economists who emphasize money supply as the
key to sustaining a healthy economy. Too much
money in circulation= inflation. Too little money=
rise in unemployment and slowing economy
The Fed: Control over money rests with the
Federal Reserve System “lender of last resort”.
Fed regulates activities of all national banks and
state banks that chose to become members of the
Fed.
o Fed has become the system through
which monetary policy has been applied;
Fed decides how much money to add or
subtract from economy–> Fed seeks a
balance that will permit steady growth in
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the economy without causing an unacceptable level of inflation.
o Concern over Fed's power has risen: should the Fed serve the interests of the public as a whole or
that of the banking sector? Should the Fed have so much power?
"Compared with fiscal policy, monetary policy can be implemented more quickly."
"The Budgetary Process"
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Although mentioned in the Constitution, executive agencies do not have any granted constitutional
authority. Rather, executive agencies' authority derives from grants of power
Executive agencies have the power of budgetary process The process through which annual federal
spending and revenue decisions are made. Agencies live and die by their budget; no agency or program can
exist without funding of any sort.
Constitution gives Congress the power to tax and spend, but as chief executive, President has a role in
determining the budget
o Congress and the president see are locked in a game of give-and-take as they each try to influence
the other on how federal funding will be distributed among various agencies and programs
o Budgetary process begins in the executive branch when the president consults with the Office of
Management and Budget (OMB) in order to establish general budget guidelines
o OMB is part of the executive office of the president and takes its Directives from the president and
uses those directives issue guidelines for each agency's budget preparations
o Agency budgets are submitted to the OMB in September, and the OMB will then finalize the agency
budgets and combined them into the president's budget proposal
President does not have any real say over most of the budget, as two-thirds of it involves mandatory
spending. "The spending is required by law, as in the
case of Social Security payments to retirees"
o OMB focuses on one third of the budget that
involves discretionary spending, which includes
defense, foreign aid, education, national parks,
space exploration, and highways
o Pres. ends up working on the margins of the
budget; in most policy areas, president
proposes a modest spending increase or
decrease over the previous year
Congress reviews the budget submitted by the
president in January. Congress has constitutional
authority over government spending and
sometimes priorities of Congress are never in
alignment with the presidents even with the
Congressional majority in the same political party
o Committees and both House and Senate will
take over the budget at this point Both the
House and Senate appropriations review
budgets Members of the House and Senate
both rely on Congressional Budget Office,
which is congressional equivalent of OMB
o After both appropriations committees have
completed their work, their
recommendations are submitted it to the
full chambers for a vote. If reconciled
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version of the budget is voted upon in both the House and Senate it is sent to the president to sign
or veto (threat of a presidential veto can often be enough to persuade Congress to except many of
the president's recommendations)
In the end, budget ends up reflecting those presidential and congressional priorities. Compromise
must be reached in order for both branches to get some of what it seeks
Key Words:
1. Monetary policy- based on monetarism, (run by the Federal Bank Reserve) monetary policy is the
manipulation of supply money in private hands by which the government can control the economy
2. Fiscal policy- policy that describes the impact of the federal budget— taxes, spending, and
borrowing— on the economy. Unlike monetary policy (which is mostly controlled by the Federal
Reserve System) fiscal policy is almost entirely determined by Congress and the president, who are the
budget makers.
3. Entitlement program- policies for which expenditures are uncontrollable because Congress has in
effect obligated itself to pay X level of benefits to Y number of recipients. Each year, Congress's bill is a
straightforward function of the X level of benefits times the Y number of beneficiaries. Social Security
benefits are an example.
4. Office of Management and Budget (OMB)- office that grew out of the Bureau of the Budget, created in
1921, consisting of a handful of political appointees and hundreds of skilled professionals. The OMB
performs both managerial and budgetary functions, and although the president is its boss, the director
and staff gave considerable independence in the budgetary process.
5. Deficit- an excess of federal expenditures over federal revenues
6. Tax expenditures- define by the 1974 Budget Act as "revenue losses attributable to provisions of the
federal tax laws which allow a special exemption, exclusion, or deduction." Tax expenditures represent
the difference between what the government actually collects in taxes: and what it would have
collected without special exemptions.
7. Incrementalism- belief that the best predictor of this year's budget is last year's budget, plus a little bit
more (an increment). According to Wildavsky, "Most of the budget is a product of previous decisions."
8. Uncontrollable expenditures- expenditures determined by how many eligible beneficiaries there are
for some particular program. According to Lance LeLoup, an expenditure is classified as uncontrollable
"if it is mandated under current law or by a previous obligation." 3/4 of the federal budget is
uncontrollable. Congress can change uncontrollable expenditures only by changing a law or existing
benefit levels.
9. Budget resolution- resolution binding Congress to a total expenditure level, supposedly the bottom
line of all federal spending programs.
10. Reconciliation- congressional prices through which program authorizations are existed to achieve
required savings. Usually also includes tax or other revenue adjustments.
11. Authorization bill- act of Congress that establishes, continues, or changed a discretionary government
program or an entitlement. It specifies program goals and maximum expenditures for discretionary
programs.
12. Appropriations bill- act of Congress that actually funds programs within limits est. by authorization
bills. Appropriations usually cover one year.
13. Continuing resolutions- when Congress cannot reach agreement and pass appropriation bills, these
revolutions allow agencies to spend at the level of one previous year.
14. Mixed economy- economic system in which the government is deeply involved in economic decisions
through it's role as regulator, consumer, subsidizer, taxer, employer, and borrower. The U.S. can be
considered a mixed economy.
15. Unemployment rate- as measured by the Bureau of labor Statistics (BLS)c the proportion of the labor
force actively seeking work but unable to find jobs.
16. Inflation- the rise in prices for consumer goods. Inflation hurts some but actually benefits others.
Groups such as those who live on fixed incomes are particularly hit hard, while people whose salary
increases are tied to the consumer price index but whose loan rates are fixed may enjoy increased
buying power.
17. Consumer price index- key measure of inflation that related the ride in prices over time.
18. Keynesian economic theory- theory emphasizing that government spending and deficits can help the
economy weather its normal ups and downs. Proponents of this theory advocate using the power of
government to stimulate the economy when it's lagging.
19. Supply-side economics- economic theory advocated by Reagan that holds that too much income goes
to taxes and too little money is available for purchasing and that the solution is incur taxes and return
purchasing power to consumers.
20. Transnational corporations- businesses with vast holdings in many countries— such as Microsoft,
Coca-Cola, and McDonald's— many of which have annual budgets exceeding that of many foreign
governments.
21. Antitrust policy- policy designed to endure competition and prevent monopoly, which is the control of
a market by one company.
22. Means-tested programs- government programs available only to individuals below the poverty line.
23. Poverty line- method used to count the number if poor people, it considered what a family would need
to spend for an "austere" standard of living.
24. Feminization of poverty- increasing concentration of poverty among women, especially unmarked
women and their children.
25. Tax incidence: proportion of its income a particular group pays in taxes
26. Environmental Impact Statement: specifies what envi effects a proposed policy would have. NEPA
requires that whenever any agency proposes to undertake a policy that is potentially disruptive of the
environment, the agency must file a statement with the EPA
27. Interdependency: mutual dependency, in which the actions of nations reverberate and affect one
another’s economic lifelines.
28. Balance of Trade: ratio of what is paid for imports to what is earned from exports. When more is
imported than exported, there is a balance-of-trade deficit.
29. OPEC: Organization of Petroleum Exporting Countries
30. The Budget and Impoundment Control Act of 1974: an act designed to reform the budgeting process
by making Congress less dependent on the president’s budget; established a fixed budget calendar and
budget committee in each house
31. 16th Amendment: Congress shall have the power to lay and collect taxes on incomes, from whatever
source derived, without apportionment among the several states, and without regard to any census or
enumeration.
32. Social Security Act: a 1935 law passed during the Great Depression that was intended t provide a
minimal level of sustenance to older Americans and thus save them from poverty
33. Medicare: a program designed to provide health care for poor Americans. Medicaid is funded by both
the states and the national government.
34. Federal Reserve System: the main instrument for making monetary policy in the US. It was created by
Congress in 1913 to regulate the lending practices of banks and thus the money supply. The seven
members of its Board of Governors are appointed to 14 year terms by the president with the consent of
the Senate.
35. Federal Trade Commission: the independent regulatory agency traditionally responsible for
regulating false and misleading trade practices. The FTC has recently become active in defending
consumer interests through its truth in advertising rule and the Consumer Credit Protection Act.
36. National Labor Relations Act: a 1935 law, also known as the Wagner Act, that guarantees workers in
the right of collective bargaining, sets down rules to protect unions and organizers, and created the
National Labor Relations Board to regulate labor management relations.
37. Environmental Protection Agency: charged with the administration of all the government’s
environmental legislation. It also administers policies dealing with toxic waste. Largest funded
independent regulatory agency.
38. National Environmental Policy Act: law passed in 1969 that is the centerpiece of federal envi policy
in the US. Established the requirements for envi impact statements.
39. Clean Air Act of 1970: Department of Transportation has the responsibility of reducing auto
emissions.
40. Clean Water Pollution Control Act: federal law governing water pollution
41. Secretary of State: head of Department of State and traditionally a key advisor to the president on
foreign policy
42. Secretary of Defense: head of Department of Defense and the president’s key adviser on military
policy; a key foreign policy actor
43. Joint Chiefs of Staff: the commanding officers of the armed services who advise the president on
military policy
44. Central Intelligence Agency: agency created after WWII to coordinate American intelligence activities
abroad. IT became involved in intrigue, conspiracy, and meddling as well.
45. Recovery Act: issued by Obama, set into motion as a response to the week economic state facing the
country. (Bailouts)
46. No Child Left Behind: requires all public schools receive federal funding to administer a state-wide
standardized test annually to all students. This means that all students have to take the same tests
under the same conditions.
47. Affordable Care Act: Obamacare
48. World Trade Organization: the only global international organization dealing with the rules of trade
between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s
trading nations and ratified in their parliaments.
Unit 9 Review
Vocab:
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Agenda setting: recognizing an issue as a problem that must be addressed as a part of the political
agenda. Problems are often brought by citizens, interest groups, the media, or governmental entities.
Policy formation: finding ways to solve a problem; exploring alternative plans of action and developing
proposals to solve the problem.
Policy adaptation: adopting a plan of action to solve the problem; may require the passage of legislation.
Policy implementation: executing the plan of action
Policy evaluation: analysis of policy and its impact upon the problem; making adjustments as necessary
Crime Prevention:
 The FBI collects and reports evidence in matters relating to the federal law or the crossing of state boarders
and provides investigative and lab services to local law enforcement agencies
 DEA (Drug Enforcement Administration) prohibits flow o illegal narcotics into U.S.
 Bureau of Alcohol, Tobacco, and Firearms (ATF) administers laws dealing with explosives and firearms and
regulates the production and distribution of alcohol and tobacco products
Education:
 Since 1950s (Brown vs. Board of Edu), the major goal of education policy has been to ensure equal access
to educational opportunities.
 Some programs for higher education have been provided for by Congress. Bush signed No Child Left
Behind Act, which requires all states to administer proficiency tests in public schools to monitor student’s
progress.
Energy:
 Conservation and study for alternative and renewable sources of fuel.
 Address issues of global warming and toxic waste disposal.
The Environment:
 Land is set aside for parks, monuments, and forests.
 1950s, Congress began [passing legislation to protect the environment (specifically air and water)
 1970s, created Environmental protection Agency (EPA), Clean Air Act, and Water Pollution Control Act
 Endangered Species Act
 Environmental Impact Statements: require studies and reports of environmental impacts to be filed with
the EPA
Health Care:
 Medicare: provides hospitalization insurance
for the elderly
 Medicaid: provides public assistance in health
care for the poor
 Existing programs include: Public Health
Services, Centers for Disease Control (CDC),
Veterans Affairs (VA), and Food and Drug
Administration (FDA)
Social Welfare:
 Began during New Deal Era
 Social Security Act (1935)
 Medicare, school aid, job training was created
during Johnson’s Great Society
 1996, Aid to Families with Dependent
Children (AFDC) was replaced by
Temporary Assistance for Needy Families
(TANF), which is a block grant that limits
recipients to no more than five years of
assistance and requires recipients to work,
receive vocational training, or participate in
community service.
Economic Policy
Raising Revenue
 Gov raises revenue through collecting taxes such as individual income taxes, corporate income taxes, social
insurance taxes, excise taxes, customs duties, and estate and gift taxes
Government Spending
 Discretionary Spending: spending about which government planners make choices, while nondiscretionary spending required by existing laws for current programs
 Non-discretionary spending includes interest on the national debt, and social welfare, and entitlement
programs
Federal Budget
 Federal Budget: indicate the amount of money the federal government expect to receive and authorize
government spending for a fiscal year.
 Fiscal year: from October 1 to September 30
 Process of preparing the federal budget takes about 18 months and involves several steps:
o Proposals: each federal agency submits a detailed estimate of its needs for the coming fiscal year to
the Office of Management and Budget (OMB)
o Executive branch: OMB holds meetings at which representatives from various agencies may explain
their proposal and try to convince the OMB that their needs are justified. President submits budget
package to Congress in January or February.
o Congress: debates and often modifies the president’s proposal. Must be passed by Sep
15. Appropriations Committee for each house submits bills to authorize spending
o President: Congress sends appropriations to the president for approval. If budget is not approved,
Congress must pass temporary emergency funding or the government with shut down
Foreign and Defense Policy
President and Foreign Policy:
 President is considered head of foreign policy, as he is the Commander-in-chief of armed forces, negotiates
treaties and executive agreements, and appoints foreign ambassadors, ministers, and consuls
The Department of State:
 Major organization for carrying out foreign policy.
 Reports directly to the president with advice
 The secretary of state also supervises the diplomatic corps of ambassadors, ministers, and consuls.
The Department of Defense (DoD):
 Provides military information to the president
 Secretary of Defense advises president on troop movements, military installations, and weapons
development
 Joint Chiefs of Staff (highest ranking officer in Army, Navy, Air force, and Marines) also provides advice on
military matters.
National Security (NSC):
 Is part of the Executive Office of the President
 Includes president, vice president, secretaries of state and defense, chairman of the Joint Chiefs of Staff,
director of the CIA, and the president’s national security advisor
United States Information Agency:
 Helps keep world informed about America, American way of life, and American views on world problems
through information centers around the world.
Central Intelligence Agency:
 Is responsible for gathering secret information essential to the national defense. Briefs president and
National Security Counsel
Current Issues in Foreign Policy:
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Nuclear Proliferation
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Terrorism
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International Trade
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Managing Conflicts Abroad