{"id":292,"date":"2021-02-05T20:18:00","date_gmt":"2021-02-05T20:18:00","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/chapter\/chapter-1\/"},"modified":"2021-02-17T17:33:26","modified_gmt":"2021-02-17T17:33:26","slug":"chapter-1","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/chapter\/chapter-1\/","title":{"raw":"Introduction to Public Economics","rendered":"Introduction to Public Economics"},"content":{"raw":"<div class=\"textbox\">\r\n\r\n<strong>Learning Outcomes:<\/strong>\r\n<ul>\r\n \t<li>Explain what economics and public economics is and why it is important<\/li>\r\n \t<li>Micro- vs Macro-Economics<\/li>\r\n \t<li>Two Roles Played by Economists<\/li>\r\n \t<li>Scientific Method<\/li>\r\n \t<li>Positive vs Normative Statements<\/li>\r\n \t<li>Explain How Economists Use Economic Models<\/li>\r\n \t<li>Circular Flow Diagram<\/li>\r\n \t<li>Market Structure<\/li>\r\n \t<li>Efficiency vs Equality<\/li>\r\n<\/ul>\r\n<\/div>\r\n&nbsp;\r\n\r\nPublic finance (also known as public economics) analyzes the impact of public policy on the allocation of resources and the distribution of income in the economy. The public sector accounts for about a third of all economic activity in the United States; and that ratio is small compared to some other industrialized countries. Government affects almost everything that we do in our daily lives, sometimes for the better, sometimes for the worse. In this course, you will learn how to use the tools of microeconomics and empirical analysis to study the taxing and the spending activities of the government. In this class topics such as social security, health insurance, income distribution and welfare programs, externalities and public goods, and taxation at federal, state, and local levels will be discussed.\r\n<h3><span style=\"background-color: #fbeeb8\">What is Economics?<\/span><\/h3>\r\n<ul>\r\n \t<li>How is economics different from finance or business administration or any other business school degree (marketing, management, etc.)?<\/li>\r\n \t<li>What is the difference between a physicists and an engineer?<\/li>\r\n \t<li>Economics is a social science!<\/li>\r\n \t<li>We study human behavior.<\/li>\r\n<\/ul>\r\n<ul>\r\n \t<li><strong>Scarcity<\/strong>: the limited nature of society\u2019s resources<\/li>\r\n \t<li><strong>Economics<\/strong>: the study of how society manages its scarce resources, e.g.<\/li>\r\n \t<li>how people decide what to buy, how much to work, save, and spend<\/li>\r\n \t<li>how firms decide how much to produce, how many workers to hire<\/li>\r\n \t<li>how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs<\/li>\r\n \t<li><strong>Economics<\/strong> is the study of the trade-offs and choices we make.<\/li>\r\n<\/ul>\r\nAll decisions involve tradeoffs.\u00a0 Examples:\r\n<ul>\r\n \t<li>Going to a party the night before your midterm leaves less time for studying.<\/li>\r\n \t<li>Having more money to buy stuff requires working longer hours, which leaves less time for leisure.<\/li>\r\n \t<li>Protecting the environment requires resources that could otherwise be used to produce consumer goods.<\/li>\r\n<\/ul>\r\n<span style=\"background-color: #fbeeb8\">Micro vs Macro...what is Public economics?<\/span>\r\n<ul>\r\n \t<li><strong>Microeconomics<\/strong> is the study of how households and firms make decisions and how they interact in markets.<\/li>\r\n \t<li>In micro we study individual markets (products), industries, sectors.<\/li>\r\n \t<li><strong>Macroeconomics<\/strong> is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.<\/li>\r\n \t<li>In macro we study economic events at the national (aggregate) level.<\/li>\r\n \t<li>These two branches of economics are closely intertwined, yet distinct\u2014they address different questions.<\/li>\r\n \t<li>The goal of public economics or public finance is to understand the proper role of the government in the economy.<\/li>\r\n \t<li>It studied the public sector and as such is classified under Microeconomics. But this sector has an immense impact on the whole economy.<\/li>\r\n \t<li>In addition, we will use some of the fundamental concepts and economic indicators typically discuss in macroeconomics.<\/li>\r\n \t<li>On the expenditure side of public economics we ask: <i>What kind of goods and services should the government provide, if any?<\/i><\/li>\r\n \t<li>On the revenue side of public economics we ask: <i>How much should the government tax it\u2019s citizens and how should that amount be related to the economic circumstances of those individuals? <\/i><\/li>\r\n<\/ul>\r\nThe\u00a0 four fundamental questions of Public Economics:\r\n\r\n1.When should the government intervene in the economy?\r\n\r\n2.How might the government intervene?\r\n\r\n3.What is the effect of those interventions on economics outcome?\r\n\r\n4.Why do governments choose to intervene the way they do?\r\n\r\nThe fundamental lesson of basic economics is that, in most cases the competitive market equilibrium is the most efficient outcome for society.\r\n\r\nIf the competitive equilibrium does not lead to the efficiency-maximizing outcome, there is the potential for efficiency improvement through government intervention.\r\n<ul>\r\n \t<li><strong>Market Failure: <\/strong>problems that cause a market economy to deliver an outcome that does not maximize efficiency.<\/li>\r\n \t<li>Examples of Market Failure:<\/li>\r\n \t<li>Externalities (positive and negative)<\/li>\r\n \t<li>Public Goods<\/li>\r\n \t<li>Monopoly or better yet\u2026.non-competitive markets<\/li>\r\n \t<li>Missing Markets<\/li>\r\n \t<li>Incomplete Markets<\/li>\r\n \t<li>Information Failure<\/li>\r\n \t<li>Principal-Agent Problems<\/li>\r\n \t<li><strong>Redistribution: <\/strong>the shifting of resources from some groups in society to others.<\/li>\r\n<\/ul>\r\n<ul>\r\n \t<li>As scientists, economists make\r\n<strong>positive statements<\/strong>,\r\nwhich attempt to describe the world as it is.<\/li>\r\n \t<li>As policy advisors, economists make\r\n<strong>normative statements<\/strong>,\r\nwhich attempt to prescribe how the world should be.<\/li>\r\n \t<li>Positive statements can be confirmed or refuted,\r\nnormative statements cannot.<\/li>\r\n<\/ul>\r\n<h3><span style=\"background-color: #ffffff\">What is Public Economics?<\/span><\/h3>\r\n<strong>Public economics<\/strong>\u00a0(or\u00a0<strong>economics of the public sector<\/strong>) is the study of government policy through the lens of\u00a0<a title=\"Economic efficiency\" href=\"https:\/\/en.wikipedia.org\/wiki\/Economic_efficiency\">economic efficiency<\/a>\u00a0and\u00a0<a title=\"Equity (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Equity_(economics)\">equity<\/a>. Public economics builds on the theory of\u00a0<a title=\"Welfare economics\" href=\"https:\/\/en.wikipedia.org\/wiki\/Welfare_economics\">welfare economics<\/a>\u00a0and is ultimately used as a tool to improve social welfare.\r\n\r\nPublic economics provides a framework for thinking about whether or not the government should participate in economic markets and to what extent it should do so.\u00a0<a class=\"mw-redirect\" title=\"Microeconomic theory\" href=\"https:\/\/en.wikipedia.org\/wiki\/Microeconomic_theory\">Microeconomic theory<\/a>\u00a0is utilized to assess whether the private\u00a0<a title=\"Market (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_(economics)\">market<\/a>\u00a0is likely to provide efficient outcomes in the absence of governmental interference; this study involves the analysis of government\u00a0<a class=\"mw-redirect\" title=\"Taxation\" href=\"https:\/\/en.wikipedia.org\/wiki\/Taxation\">taxation<\/a>\u00a0and\u00a0<a title=\"Government spending\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_spending\">expenditures<\/a>.\r\n\r\nThis subject encompasses a host of topics notably\u00a0<a title=\"Market failure\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_failure\">market failures<\/a>\u00a0such as,\u00a0<a title=\"Public good (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_good_(economics)\">public goods<\/a>,\u00a0<a class=\"mw-redirect\" title=\"Externalities\" href=\"https:\/\/en.wikipedia.org\/wiki\/Externalities\">externalities<\/a>\u00a0and\u00a0<a title=\"Imperfect competition\" href=\"https:\/\/en.wikipedia.org\/wiki\/Imperfect_competition\">Imperfect Competition<\/a>, and the creation and implementation of government policy.\r\n\r\nBroad methods and topics include:\r\n<ul>\r\n \t<li>the theory and application of\u00a0<a title=\"Public finance\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_finance\">public finance<\/a><sup id=\"cite_ref-2\" class=\"reference\"><\/sup><\/li>\r\n \t<li>analysis and\u00a0<a title=\"Mechanism design\" href=\"https:\/\/en.wikipedia.org\/wiki\/Mechanism_design\">design<\/a>\u00a0of\u00a0<a title=\"Public policy\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_policy\">public policy<\/a><sup id=\"cite_ref-3\" class=\"reference\"><\/sup><\/li>\r\n \t<li><a title=\"Distribution (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Distribution_(economics)\">distributional<\/a>\u00a0<a title=\"Redistribution of income and wealth\" href=\"https:\/\/en.wikipedia.org\/wiki\/Redistribution_of_income_and_wealth\">effects<\/a>\u00a0of taxation and government expenditures<sup id=\"cite_ref-4\" class=\"reference\"><\/sup><\/li>\r\n \t<li>analysis of\u00a0<a title=\"Market failure\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_failure\">market failure<\/a><sup id=\"cite_ref-5\" class=\"reference\"><a href=\"https:\/\/en.wikipedia.org\/wiki\/Public_economics#cite_note-5\">[5]<\/a><\/sup>\u00a0and\u00a0<a title=\"Government failure\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_failure\">government failure<\/a>.<sup id=\"cite_ref-6\" class=\"reference\"><\/sup><\/li>\r\n<\/ul>\r\nEmphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from\u00a0<a title=\"Economic ideology\" href=\"https:\/\/en.wikipedia.org\/wiki\/Economic_ideology\">ideology<\/a>. Examples of topics covered are\u00a0<a title=\"Tax incidence\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax_incidence\">tax incidence<\/a>, <sup id=\"cite_ref-7\" class=\"reference\"><\/sup><a title=\"Optimal tax\" href=\"https:\/\/en.wikipedia.org\/wiki\/Optimal_tax\">optimal taxation<\/a>,<sup id=\"cite_ref-8\" class=\"reference\"><\/sup>\u00a0and the theory of\u00a0<a class=\"mw-redirect\" title=\"Public goods\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_goods\">public goods<\/a>.<sup id=\"cite_ref-PublicGood_9-0\" class=\"reference\"><\/sup>\r\n<h4><span id=\"Market_Failures\" class=\"mw-headline\">Market Failures<\/span><\/h4>\r\nThe role of government in providing efficient and equitable markets is largely underpinned by addressing\u00a0<a class=\"mw-redirect\" title=\"Market failures\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_failures\">market failures<\/a>\u00a0that may arise. Public Economics focuses on when and to what degree the government should intervene in the economy to address market failures.<sup id=\"cite_ref-:0_19-0\" class=\"reference\"><\/sup>\u00a0Some examples of government intervention are providing pure public goods such as defense, regulating negative externalities such as\u00a0<a title=\"Pollution\" href=\"https:\/\/en.wikipedia.org\/wiki\/Pollution\">pollution<\/a>\u00a0and addressing imperfect market conditions such as\u00a0<a class=\"mw-redirect\" title=\"Asymmetric information\" href=\"https:\/\/en.wikipedia.org\/wiki\/Asymmetric_information\">asymmetric information<\/a>.\r\n<h4><span id=\"Public_Goods\" class=\"mw-headline\">Public Goods<\/span><\/h4>\r\n<a class=\"mw-redirect\" title=\"Pure public good\" href=\"https:\/\/en.wikipedia.org\/wiki\/Pure_public_good\">Pure public goods<\/a>, or collective consumption goods, exhibit two properties; non-rivalry and non-excludability. Something is non-rivaled if one person's consumption of it does not deprive another person, (to a point) a firework display is non-rivaled - since one person watching a firework display does not prevent another person from doing so. Something is non-excludable if its use cannot be limited to a certain group of people. Again, since one cannot prevent people from viewing a firework display it is non-excludable.<sup id=\"cite_ref-PublicGood_9-1\" class=\"reference\"><\/sup>\u00a0Another example, of a pure public good is knowledge. Consider a book. The book itself can be destroyed and thus is excludable. However, the knowledge obtained from the book is far more difficult to destroy and is non-rivalrous and non-excludable. <sup id=\"cite_ref-20\" class=\"reference\"><\/sup>\u00a0In reality, not all public goods can be classed as 'pure' and most display some degree of excludability and rivalrous. These are known as\u00a0<a class=\"mw-redirect\" title=\"Impure public good\" href=\"https:\/\/en.wikipedia.org\/wiki\/Impure_public_good\">Impure public goods<\/a>.<sup id=\"cite_ref-:1_21-0\" class=\"reference\"><\/sup>\r\n\r\nDue to the two unique properties that public goods exhibit, being non-rivalrous &amp; non-excludable, it is unlikely that without intervention markets will produce the efficient amount. It therefore, the role of government to regulate the production of public goods so as to create an efficient market equilibrium.<sup id=\"cite_ref-:0_19-1\" class=\"reference\"><a href=\"https:\/\/en.wikipedia.org\/wiki\/Public_economics#cite_note-:0-19\">[19]<\/a><\/sup>\r\n<h4><span id=\"Externalities\" class=\"mw-headline\">Externalities<\/span><\/h4>\r\nExternalities arise when consumption by individuals or production by firms affect the utility or production function of other individuals or firms.<sup id=\"cite_ref-22\" class=\"reference\"><\/sup>\u00a0Positive externalities are education, public health and others while examples of negative externalities are air pollution,\u00a0<a title=\"Noise pollution\" href=\"https:\/\/en.wikipedia.org\/wiki\/Noise_pollution\">noise pollution<\/a>, non-vaccination and more.<sup id=\"cite_ref-23\" class=\"reference\"><\/sup>\r\n\r\nPigou describes as\u00a0<a class=\"mw-redirect\" title=\"Positive externalities\" href=\"https:\/\/en.wikipedia.org\/wiki\/Positive_externalities\">positive externalities<\/a>, examples such as resources invested in private parks that improve the surrounding air, and scientific research from which discoveries of high practical utility often grow. Alternatively, he describes\u00a0<a class=\"mw-redirect\" title=\"Negative externalities\" href=\"https:\/\/en.wikipedia.org\/wiki\/Negative_externalities\">negative externalities<\/a>, such as the factory that destroys a great part of the amenities of neighboring sites.\r\n\r\nThe role of government is to address the negative external effects and societal\u00a0<a title=\"Deadweight loss\" href=\"https:\/\/en.wikipedia.org\/wiki\/Deadweight_loss\">deadweight loss<\/a>\u00a0created from inefficient markets<sup id=\"cite_ref-:0_19-2\" class=\"reference\"><\/sup>\r\n<h4><span id=\"Imperfect_Competition\" class=\"mw-headline\">Imperfect Competition<\/span><\/h4>\r\n<a title=\"Imperfect competition\" href=\"https:\/\/en.wikipedia.org\/wiki\/Imperfect_competition\">Imperfect competition<\/a>\u00a0within markets can take many forms and will often depend on the barriers to entry, firms profit and production objectives and the nature of the product and respective market.<sup id=\"cite_ref-:1_21-1\" class=\"reference\"><\/sup>\u00a0Imperfect competition will lead to a social cost and it is the role of government to minimize this cost.<sup id=\"cite_ref-24\" class=\"reference\"><\/sup>\u00a0Some notable imperfection include:\r\n<ol>\r\n \t<li>Companies sell differentiated products<\/li>\r\n \t<li>There are barriers to exit and entry<\/li>\r\n \t<li>Suboptimal output and pricing<\/li>\r\n<\/ol>\r\nIn its essence, the role of government is to address the issues that arise from these market failures and decide the optimal degree of intervention necessary.\u00a0<sup id=\"cite_ref-:0_19-3\" class=\"reference\"><\/sup>\r\n<h3>Basics of the Government Institutions and Types of Economic Policies<\/h3>\r\nHere are three very important questions that everyone should understand:\r\n<ol>\r\n \t<li>What is the difference between The Federal Government and The Federal Reserves?<\/li>\r\n \t<li>What is the difference between Treasury Department and The Federal Reserves?<\/li>\r\n \t<li>What is the difference between Fiscal and Monetary Policy?<\/li>\r\n<\/ol>\r\n<p class=\"q-text qu-display--block\">First a very short explanation: The Treasury makes payments as ordered by the Executive branch agencies based on budgets set by Legislature. The Fed processes payments as a kind of middleman between Government and private banks.\u00a0The Fed controls monetary policy \u2014 interest rate targets in financial markets. Fed sets the overnight funds rate. Treasury is an agent of fiscal policy \u2014 spending \u2014 but spends what it is ordered to spend by other agencies and Congress<\/p>\r\n<p class=\"q-text qu-display--block\">There\u2019s more to the story.\u00a0 Let's get into this topic a bit more carefully!<\/p>\r\nOne of the biggest points in confusion in economics (especially macroeconomics and public policy) is the difference first between the Federal Government and the Federal Reserve also referred to as The Fed. The main reason for the confusion may come from the fact that both of these two institutions have the term \"federal\" in it. But these institutions are quite different from each other and play very different roles\u00a0in the US economy.\r\n\r\nLet's first start with the US Federal Government.\r\n\r\nThe United States of America has a very complex government system. First, it is comprised of 50 states with it's own state, municipal and local governments. The union of these 50 states is tied together be the Federal Government. The <strong>federal government of the United States<\/strong>\u00a0(<strong>U.S. federal government<\/strong>)<sup id=\"cite_ref-2\" class=\"reference\"><\/sup>\u00a0is the\u00a0<a title=\"Federation\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federation#Federal_governments\">national government<\/a>\u00a0of the\u00a0<a title=\"United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States\">United States<\/a>, composed of 50\u00a0<a title=\"U.S. state\" href=\"https:\/\/en.wikipedia.org\/wiki\/U.S._state\">states<\/a>. The United States government is based on the principles of\u00a0<a title=\"Federalism in the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federalism_in_the_United_States\">federalism<\/a>\u00a0and\u00a0<a title=\"Republicanism in the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Republicanism_in_the_United_States\">republicanism<\/a>, in which power is shared between the federal government and\u00a0<a title=\"State governments of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/State_governments_of_the_United_States\">state governments<\/a>. \u00a0<strong>Federalism in the United States<\/strong>\u00a0is the constitutional division of power between\u00a0<a title=\"U.S. state\" href=\"https:\/\/en.wikipedia.org\/wiki\/U.S._state\">U.S. state<\/a>\u00a0governments and the\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States\">federal government of the United States<\/a>. The argument of which should hold more power has dominated the federalism debate, with the\u00a0<a title=\"Republican Party (United States)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Republican_Party_(United_States)\">Republican Party<\/a> traditionally favoring\u00a0strong state governments and weak federal government and the\u00a0<a title=\"Democratic Party (United States)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Democratic_Party_(United_States)\">Democratic Party<\/a>, the opposite.\r\n\r\nThe federal government is composed of three distinct branches:\u00a0<a title=\"United States Congress\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Congress\">legislative<\/a> (the\u00a0<a title=\"United States Congress\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Congress\">Congress<\/a>), <a href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States#Executive_branch\">executive<\/a> (the\u00a0<a title=\"President of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/President_of_the_United_States\">president)<\/a>, and\u00a0<a title=\"Federal judiciary of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_judiciary_of_the_United_States\">judicial<\/a> (he\u00a0<a class=\"mw-redirect\" title=\"Federal Courts of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_Courts_of_the_United_States\">federal courts<\/a>)\u00a0whose powers are vested by the\u00a0<a class=\"mw-redirect\" title=\"United States Constitution\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Constitution\">U.S. Constitution.<\/a>\r\n\r\nState governments have the greatest influence over most Americans' daily lives. The\u00a0<a title=\"Tenth Amendment to the United States Constitution\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tenth_Amendment_to_the_United_States_Constitution\">Tenth Amendment<\/a>\u00a0prohibits the federal government from exercising any power not delegated to it by the Constitution; as a result, states handle the majority of issues most relevant to individuals within their jurisdiction. Because state governments are not authorized to print currency, they generally have to raise revenue through either taxes or bonds. As a result, state governments tend to impose severe budget cuts or raise taxes any time the economy is faltering.\r\n\r\nThe\u00a0<strong>Department of the Treasury<\/strong>\u00a0(<strong>USDT<\/strong>)<sup id=\"cite_ref-isbn0313245789-pp275_2-0\" class=\"reference\"><\/sup>\u00a0is the\u00a0<a title=\"Treasury\" href=\"https:\/\/en.wikipedia.org\/wiki\/Treasury\">national treasury<\/a>\u00a0of the\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States\">federal government of the United States<\/a>\u00a0where it serves as an\u00a0<a title=\"United States federal executive departments\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_federal_executive_departments\">executive department<\/a>. The USDT\u00a0<a title=\"Tax collector\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax_collector\">collects<\/a>\u00a0all\u00a0<a title=\"Taxation in the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Taxation_in_the_United_States\">federal taxes<\/a>\u00a0through the\u00a0<a title=\"Internal Revenue Service\" href=\"https:\/\/en.wikipedia.org\/wiki\/Internal_Revenue_Service\">Internal Revenue Service<\/a>; manages\u00a0<a title=\"United States Treasury security\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Treasury_security\">U.S. government debt instruments<\/a>;\u00a0<a title=\"Bank regulation\" href=\"https:\/\/en.wikipedia.org\/wiki\/Bank_regulation#Licensing_and_supervision\">licenses and supervises banks<\/a>\u00a0and\u00a0<a title=\"Savings and loan association\" href=\"https:\/\/en.wikipedia.org\/wiki\/Savings_and_loan_association\">thrift institutions<\/a>; and advises the\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States#Legislative_branch\">legislative<\/a>\u00a0and\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States#Executive_branch\">executive branches<\/a>\u00a0on matters of\u00a0<a title=\"Fiscal policy\" href=\"https:\/\/en.wikipedia.org\/wiki\/Fiscal_policy\">fiscal policy<\/a>.\r\n<p class=\"q-text qu-display--block\">The\u00a0<a href=\"https:\/\/www.thebalance.com\/the-federal-reserve-system-and-its-function-3306001\">Federal Reserve<\/a> or the Fed is America's central bank. Its job is to manage the U.S. money supply. For that reason, many people say the Fed prints money.\u00a0That doesn't mean the Fed has a printing press that cranks out dollars. Only the\u00a0<a href=\"https:\/\/www.thebalance.com\/u-s-department-of-treasury-what-it-does-and-its-effect-3305998\">U.S. Department of the Treasury<\/a> does that. In other words, the U.S. Treasury Department prints the money, but it's the Federal Reserve Banks that controls and distribute it.<\/p>\r\n<p class=\"q-text qu-display--block\">Each of the 12 Federal Reserve Banks keeps an inventory of cash on hand to meet the needs of the depository institutions in its District. The Treasury Department has two divisions that produce the cash: the Bureau of Engraving and Printing, which prints currency, and the United States Mint, which makes coins. So, yes, technically and logistically speaking it is the Treasury Department that physically creates (prints and mints) the money, but it's up to the Fed to decide how much of it they want to distribute it. In addition, the Fed can increase or decrease the money supply without actually printing any money. This is part of their monetary policy. As a result, most economists refer to the Fed as \"printing\" or creating the money not to the Treasury.<\/p>\r\nWhat is the difference between Fiscal and Monetary Policy?\r\n\r\nIn Short: Monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the tax and spending policies of the federal government. Fiscal policy decisions are determined by the Congress and the Administration; the Fed plays no role in determining fiscal policy.\r\n\r\nLearning the difference between fiscal policy and monetary policy is essential to understanding who does what when it comes to the federal government and the Federal Reserve. The short answer is that Congress and the administration conduct fiscal policy, while the Fed conducts monetary policy.\r\n\r\nBoth types of policy can have a significant effect on our everyday lives, but the lines between them can seem blurry to the average consumer. Let\u2019s sort it out.\r\n\r\nMonetary Policy Is the Federal Reserve\u2019s Role\r\n\r\nThe word \u201cmonetary\u201d means having to do with money. And monetary policy is the wheelhouse of a central bank. How does the Federal Reserve conduct monetary policy? It can do so by influencing the supply of money in the economy, as well as influencing interest rates in markets.\r\n\r\nTo influence the money supply and interest rates, the Fed has various tools. Some key ones include:\r\n<ul>\r\n \t<li>Open market operations<\/li>\r\n \t<li>The discount rate<\/li>\r\n \t<li>Reserve requirements<\/li>\r\n \t<li>Interest on reserve balances<\/li>\r\n<\/ul>\r\nFiscal Policy Is the Federal Government\u2019s Role\r\n\r\nThe word \u201cfiscal\u201d relates to public treasury or revenues. Fiscal policy<strong>\u00a0<\/strong>is a broad term used to refer to the tax and spending policies of the federal government. Fiscal policy refers to government spending and taxing decisions. Economics textbooks and various economic models usually think of fiscal policy in terms of the size of the government budget deficit, the difference between what the government spends and its revenue.\r\n\r\n<img src=\"https:\/\/www.stlouisfed.org\/~\/media\/Blog\/2018\/October\/OVBlogImage_Monetary_v_Fiscal.png?la=en\" \/>\r\n\r\nIn short, fiscal policy\u00a0is the use of\u00a0<a title=\"Government revenue\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_revenue\">government revenue<\/a>\u00a0collection (<a title=\"Tax\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax\">taxes<\/a>\u00a0or\u00a0<a class=\"mw-redirect\" title=\"Tax cuts\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax_cuts\">tax cuts<\/a>) and\u00a0<a title=\"Government spending\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_spending\">expenditure<\/a>\u00a0to influence a country's economy. Fiscal policy is when governments at <strong>all levels<\/strong> (federal, state, or local) are adjusting their taxes, subsidies, or expenditures. But when it comes to the mainstream political debates, we are typically focusing on the federal government. These are precisely the issues that are covered in public finance and public economics.\r\n\r\nOn the other had, monetary policy conducted via the Fed by fixing the money supply is a macroeconomic topic typically addresses in a class on Money and Banking and Financial Economics.\u00a0 <strong>This will NOT be the focus of this class!\u00a0\u00a0<\/strong>\r\n\r\n<span style=\"background-color: #fbeeb8\">Efficiency vs Equity<\/span>\r\n\r\n&nbsp;\r\n\r\n<strong>Few questions to consider:<\/strong>\r\n\r\n<strong>What is the role of the government in the economy?<\/strong>\r\n\r\n&nbsp;\r\n\r\n&nbsp;","rendered":"<div class=\"textbox\">\n<p><strong>Learning Outcomes:<\/strong><\/p>\n<ul>\n<li>Explain what economics and public economics is and why it is important<\/li>\n<li>Micro- vs Macro-Economics<\/li>\n<li>Two Roles Played by Economists<\/li>\n<li>Scientific Method<\/li>\n<li>Positive vs Normative Statements<\/li>\n<li>Explain How Economists Use Economic Models<\/li>\n<li>Circular Flow Diagram<\/li>\n<li>Market Structure<\/li>\n<li>Efficiency vs Equality<\/li>\n<\/ul>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Public finance (also known as public economics) analyzes the impact of public policy on the allocation of resources and the distribution of income in the economy. The public sector accounts for about a third of all economic activity in the United States; and that ratio is small compared to some other industrialized countries. Government affects almost everything that we do in our daily lives, sometimes for the better, sometimes for the worse. In this course, you will learn how to use the tools of microeconomics and empirical analysis to study the taxing and the spending activities of the government. In this class topics such as social security, health insurance, income distribution and welfare programs, externalities and public goods, and taxation at federal, state, and local levels will be discussed.<\/p>\n<h3><span style=\"background-color: #fbeeb8\">What is Economics?<\/span><\/h3>\n<ul>\n<li>How is economics different from finance or business administration or any other business school degree (marketing, management, etc.)?<\/li>\n<li>What is the difference between a physicists and an engineer?<\/li>\n<li>Economics is a social science!<\/li>\n<li>We study human behavior.<\/li>\n<\/ul>\n<ul>\n<li><strong>Scarcity<\/strong>: the limited nature of society\u2019s resources<\/li>\n<li><strong>Economics<\/strong>: the study of how society manages its scarce resources, e.g.<\/li>\n<li>how people decide what to buy, how much to work, save, and spend<\/li>\n<li>how firms decide how much to produce, how many workers to hire<\/li>\n<li>how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs<\/li>\n<li><strong>Economics<\/strong> is the study of the trade-offs and choices we make.<\/li>\n<\/ul>\n<p>All decisions involve tradeoffs.\u00a0 Examples:<\/p>\n<ul>\n<li>Going to a party the night before your midterm leaves less time for studying.<\/li>\n<li>Having more money to buy stuff requires working longer hours, which leaves less time for leisure.<\/li>\n<li>Protecting the environment requires resources that could otherwise be used to produce consumer goods.<\/li>\n<\/ul>\n<p><span style=\"background-color: #fbeeb8\">Micro vs Macro&#8230;what is Public economics?<\/span><\/p>\n<ul>\n<li><strong>Microeconomics<\/strong> is the study of how households and firms make decisions and how they interact in markets.<\/li>\n<li>In micro we study individual markets (products), industries, sectors.<\/li>\n<li><strong>Macroeconomics<\/strong> is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.<\/li>\n<li>In macro we study economic events at the national (aggregate) level.<\/li>\n<li>These two branches of economics are closely intertwined, yet distinct\u2014they address different questions.<\/li>\n<li>The goal of public economics or public finance is to understand the proper role of the government in the economy.<\/li>\n<li>It studied the public sector and as such is classified under Microeconomics. But this sector has an immense impact on the whole economy.<\/li>\n<li>In addition, we will use some of the fundamental concepts and economic indicators typically discuss in macroeconomics.<\/li>\n<li>On the expenditure side of public economics we ask: <i>What kind of goods and services should the government provide, if any?<\/i><\/li>\n<li>On the revenue side of public economics we ask: <i>How much should the government tax it\u2019s citizens and how should that amount be related to the economic circumstances of those individuals? <\/i><\/li>\n<\/ul>\n<p>The\u00a0 four fundamental questions of Public Economics:<\/p>\n<p>1.When should the government intervene in the economy?<\/p>\n<p>2.How might the government intervene?<\/p>\n<p>3.What is the effect of those interventions on economics outcome?<\/p>\n<p>4.Why do governments choose to intervene the way they do?<\/p>\n<p>The fundamental lesson of basic economics is that, in most cases the competitive market equilibrium is the most efficient outcome for society.<\/p>\n<p>If the competitive equilibrium does not lead to the efficiency-maximizing outcome, there is the potential for efficiency improvement through government intervention.<\/p>\n<ul>\n<li><strong>Market Failure: <\/strong>problems that cause a market economy to deliver an outcome that does not maximize efficiency.<\/li>\n<li>Examples of Market Failure:<\/li>\n<li>Externalities (positive and negative)<\/li>\n<li>Public Goods<\/li>\n<li>Monopoly or better yet\u2026.non-competitive markets<\/li>\n<li>Missing Markets<\/li>\n<li>Incomplete Markets<\/li>\n<li>Information Failure<\/li>\n<li>Principal-Agent Problems<\/li>\n<li><strong>Redistribution: <\/strong>the shifting of resources from some groups in society to others.<\/li>\n<\/ul>\n<ul>\n<li>As scientists, economists make<br \/>\n<strong>positive statements<\/strong>,<br \/>\nwhich attempt to describe the world as it is.<\/li>\n<li>As policy advisors, economists make<br \/>\n<strong>normative statements<\/strong>,<br \/>\nwhich attempt to prescribe how the world should be.<\/li>\n<li>Positive statements can be confirmed or refuted,<br \/>\nnormative statements cannot.<\/li>\n<\/ul>\n<h3><span style=\"background-color: #ffffff\">What is Public Economics?<\/span><\/h3>\n<p><strong>Public economics<\/strong>\u00a0(or\u00a0<strong>economics of the public sector<\/strong>) is the study of government policy through the lens of\u00a0<a title=\"Economic efficiency\" href=\"https:\/\/en.wikipedia.org\/wiki\/Economic_efficiency\">economic efficiency<\/a>\u00a0and\u00a0<a title=\"Equity (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Equity_(economics)\">equity<\/a>. Public economics builds on the theory of\u00a0<a title=\"Welfare economics\" href=\"https:\/\/en.wikipedia.org\/wiki\/Welfare_economics\">welfare economics<\/a>\u00a0and is ultimately used as a tool to improve social welfare.<\/p>\n<p>Public economics provides a framework for thinking about whether or not the government should participate in economic markets and to what extent it should do so.\u00a0<a class=\"mw-redirect\" title=\"Microeconomic theory\" href=\"https:\/\/en.wikipedia.org\/wiki\/Microeconomic_theory\">Microeconomic theory<\/a>\u00a0is utilized to assess whether the private\u00a0<a title=\"Market (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_(economics)\">market<\/a>\u00a0is likely to provide efficient outcomes in the absence of governmental interference; this study involves the analysis of government\u00a0<a class=\"mw-redirect\" title=\"Taxation\" href=\"https:\/\/en.wikipedia.org\/wiki\/Taxation\">taxation<\/a>\u00a0and\u00a0<a title=\"Government spending\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_spending\">expenditures<\/a>.<\/p>\n<p>This subject encompasses a host of topics notably\u00a0<a title=\"Market failure\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_failure\">market failures<\/a>\u00a0such as,\u00a0<a title=\"Public good (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_good_(economics)\">public goods<\/a>,\u00a0<a class=\"mw-redirect\" title=\"Externalities\" href=\"https:\/\/en.wikipedia.org\/wiki\/Externalities\">externalities<\/a>\u00a0and\u00a0<a title=\"Imperfect competition\" href=\"https:\/\/en.wikipedia.org\/wiki\/Imperfect_competition\">Imperfect Competition<\/a>, and the creation and implementation of government policy.<\/p>\n<p>Broad methods and topics include:<\/p>\n<ul>\n<li>the theory and application of\u00a0<a title=\"Public finance\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_finance\">public finance<\/a><sup id=\"cite_ref-2\" class=\"reference\"><\/sup><\/li>\n<li>analysis and\u00a0<a title=\"Mechanism design\" href=\"https:\/\/en.wikipedia.org\/wiki\/Mechanism_design\">design<\/a>\u00a0of\u00a0<a title=\"Public policy\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_policy\">public policy<\/a><sup id=\"cite_ref-3\" class=\"reference\"><\/sup><\/li>\n<li><a title=\"Distribution (economics)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Distribution_(economics)\">distributional<\/a>\u00a0<a title=\"Redistribution of income and wealth\" href=\"https:\/\/en.wikipedia.org\/wiki\/Redistribution_of_income_and_wealth\">effects<\/a>\u00a0of taxation and government expenditures<sup id=\"cite_ref-4\" class=\"reference\"><\/sup><\/li>\n<li>analysis of\u00a0<a title=\"Market failure\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_failure\">market failure<\/a><sup id=\"cite_ref-5\" class=\"reference\"><a href=\"https:\/\/en.wikipedia.org\/wiki\/Public_economics#cite_note-5\">[5]<\/a><\/sup>\u00a0and\u00a0<a title=\"Government failure\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_failure\">government failure<\/a>.<sup id=\"cite_ref-6\" class=\"reference\"><\/sup><\/li>\n<\/ul>\n<p>Emphasis is on analytical and scientific methods and normative-ethical analysis, as distinguished from\u00a0<a title=\"Economic ideology\" href=\"https:\/\/en.wikipedia.org\/wiki\/Economic_ideology\">ideology<\/a>. Examples of topics covered are\u00a0<a title=\"Tax incidence\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax_incidence\">tax incidence<\/a>, <sup id=\"cite_ref-7\" class=\"reference\"><\/sup><a title=\"Optimal tax\" href=\"https:\/\/en.wikipedia.org\/wiki\/Optimal_tax\">optimal taxation<\/a>,<sup id=\"cite_ref-8\" class=\"reference\"><\/sup>\u00a0and the theory of\u00a0<a class=\"mw-redirect\" title=\"Public goods\" href=\"https:\/\/en.wikipedia.org\/wiki\/Public_goods\">public goods<\/a>.<sup id=\"cite_ref-PublicGood_9-0\" class=\"reference\"><\/sup><\/p>\n<h4><span id=\"Market_Failures\" class=\"mw-headline\">Market Failures<\/span><\/h4>\n<p>The role of government in providing efficient and equitable markets is largely underpinned by addressing\u00a0<a class=\"mw-redirect\" title=\"Market failures\" href=\"https:\/\/en.wikipedia.org\/wiki\/Market_failures\">market failures<\/a>\u00a0that may arise. Public Economics focuses on when and to what degree the government should intervene in the economy to address market failures.<sup id=\"cite_ref-:0_19-0\" class=\"reference\"><\/sup>\u00a0Some examples of government intervention are providing pure public goods such as defense, regulating negative externalities such as\u00a0<a title=\"Pollution\" href=\"https:\/\/en.wikipedia.org\/wiki\/Pollution\">pollution<\/a>\u00a0and addressing imperfect market conditions such as\u00a0<a class=\"mw-redirect\" title=\"Asymmetric information\" href=\"https:\/\/en.wikipedia.org\/wiki\/Asymmetric_information\">asymmetric information<\/a>.<\/p>\n<h4><span id=\"Public_Goods\" class=\"mw-headline\">Public Goods<\/span><\/h4>\n<p><a class=\"mw-redirect\" title=\"Pure public good\" href=\"https:\/\/en.wikipedia.org\/wiki\/Pure_public_good\">Pure public goods<\/a>, or collective consumption goods, exhibit two properties; non-rivalry and non-excludability. Something is non-rivaled if one person&#8217;s consumption of it does not deprive another person, (to a point) a firework display is non-rivaled &#8211; since one person watching a firework display does not prevent another person from doing so. Something is non-excludable if its use cannot be limited to a certain group of people. Again, since one cannot prevent people from viewing a firework display it is non-excludable.<sup id=\"cite_ref-PublicGood_9-1\" class=\"reference\"><\/sup>\u00a0Another example, of a pure public good is knowledge. Consider a book. The book itself can be destroyed and thus is excludable. However, the knowledge obtained from the book is far more difficult to destroy and is non-rivalrous and non-excludable. <sup id=\"cite_ref-20\" class=\"reference\"><\/sup>\u00a0In reality, not all public goods can be classed as &#8216;pure&#8217; and most display some degree of excludability and rivalrous. These are known as\u00a0<a class=\"mw-redirect\" title=\"Impure public good\" href=\"https:\/\/en.wikipedia.org\/wiki\/Impure_public_good\">Impure public goods<\/a>.<sup id=\"cite_ref-:1_21-0\" class=\"reference\"><\/sup><\/p>\n<p>Due to the two unique properties that public goods exhibit, being non-rivalrous &amp; non-excludable, it is unlikely that without intervention markets will produce the efficient amount. It therefore, the role of government to regulate the production of public goods so as to create an efficient market equilibrium.<sup id=\"cite_ref-:0_19-1\" class=\"reference\"><a href=\"https:\/\/en.wikipedia.org\/wiki\/Public_economics#cite_note-:0-19\">[19]<\/a><\/sup><\/p>\n<h4><span id=\"Externalities\" class=\"mw-headline\">Externalities<\/span><\/h4>\n<p>Externalities arise when consumption by individuals or production by firms affect the utility or production function of other individuals or firms.<sup id=\"cite_ref-22\" class=\"reference\"><\/sup>\u00a0Positive externalities are education, public health and others while examples of negative externalities are air pollution,\u00a0<a title=\"Noise pollution\" href=\"https:\/\/en.wikipedia.org\/wiki\/Noise_pollution\">noise pollution<\/a>, non-vaccination and more.<sup id=\"cite_ref-23\" class=\"reference\"><\/sup><\/p>\n<p>Pigou describes as\u00a0<a class=\"mw-redirect\" title=\"Positive externalities\" href=\"https:\/\/en.wikipedia.org\/wiki\/Positive_externalities\">positive externalities<\/a>, examples such as resources invested in private parks that improve the surrounding air, and scientific research from which discoveries of high practical utility often grow. Alternatively, he describes\u00a0<a class=\"mw-redirect\" title=\"Negative externalities\" href=\"https:\/\/en.wikipedia.org\/wiki\/Negative_externalities\">negative externalities<\/a>, such as the factory that destroys a great part of the amenities of neighboring sites.<\/p>\n<p>The role of government is to address the negative external effects and societal\u00a0<a title=\"Deadweight loss\" href=\"https:\/\/en.wikipedia.org\/wiki\/Deadweight_loss\">deadweight loss<\/a>\u00a0created from inefficient markets<sup id=\"cite_ref-:0_19-2\" class=\"reference\"><\/sup><\/p>\n<h4><span id=\"Imperfect_Competition\" class=\"mw-headline\">Imperfect Competition<\/span><\/h4>\n<p><a title=\"Imperfect competition\" href=\"https:\/\/en.wikipedia.org\/wiki\/Imperfect_competition\">Imperfect competition<\/a>\u00a0within markets can take many forms and will often depend on the barriers to entry, firms profit and production objectives and the nature of the product and respective market.<sup id=\"cite_ref-:1_21-1\" class=\"reference\"><\/sup>\u00a0Imperfect competition will lead to a social cost and it is the role of government to minimize this cost.<sup id=\"cite_ref-24\" class=\"reference\"><\/sup>\u00a0Some notable imperfection include:<\/p>\n<ol>\n<li>Companies sell differentiated products<\/li>\n<li>There are barriers to exit and entry<\/li>\n<li>Suboptimal output and pricing<\/li>\n<\/ol>\n<p>In its essence, the role of government is to address the issues that arise from these market failures and decide the optimal degree of intervention necessary.\u00a0<sup id=\"cite_ref-:0_19-3\" class=\"reference\"><\/sup><\/p>\n<h3>Basics of the Government Institutions and Types of Economic Policies<\/h3>\n<p>Here are three very important questions that everyone should understand:<\/p>\n<ol>\n<li>What is the difference between The Federal Government and The Federal Reserves?<\/li>\n<li>What is the difference between Treasury Department and The Federal Reserves?<\/li>\n<li>What is the difference between Fiscal and Monetary Policy?<\/li>\n<\/ol>\n<p class=\"q-text qu-display--block\">First a very short explanation: The Treasury makes payments as ordered by the Executive branch agencies based on budgets set by Legislature. The Fed processes payments as a kind of middleman between Government and private banks.\u00a0The Fed controls monetary policy \u2014 interest rate targets in financial markets. Fed sets the overnight funds rate. Treasury is an agent of fiscal policy \u2014 spending \u2014 but spends what it is ordered to spend by other agencies and Congress<\/p>\n<p class=\"q-text qu-display--block\">There\u2019s more to the story.\u00a0 Let&#8217;s get into this topic a bit more carefully!<\/p>\n<p>One of the biggest points in confusion in economics (especially macroeconomics and public policy) is the difference first between the Federal Government and the Federal Reserve also referred to as The Fed. The main reason for the confusion may come from the fact that both of these two institutions have the term &#8220;federal&#8221; in it. But these institutions are quite different from each other and play very different roles\u00a0in the US economy.<\/p>\n<p>Let&#8217;s first start with the US Federal Government.<\/p>\n<p>The United States of America has a very complex government system. First, it is comprised of 50 states with it&#8217;s own state, municipal and local governments. The union of these 50 states is tied together be the Federal Government. The <strong>federal government of the United States<\/strong>\u00a0(<strong>U.S. federal government<\/strong>)<sup id=\"cite_ref-2\" class=\"reference\"><\/sup>\u00a0is the\u00a0<a title=\"Federation\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federation#Federal_governments\">national government<\/a>\u00a0of the\u00a0<a title=\"United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States\">United States<\/a>, composed of 50\u00a0<a title=\"U.S. state\" href=\"https:\/\/en.wikipedia.org\/wiki\/U.S._state\">states<\/a>. The United States government is based on the principles of\u00a0<a title=\"Federalism in the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federalism_in_the_United_States\">federalism<\/a>\u00a0and\u00a0<a title=\"Republicanism in the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Republicanism_in_the_United_States\">republicanism<\/a>, in which power is shared between the federal government and\u00a0<a title=\"State governments of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/State_governments_of_the_United_States\">state governments<\/a>. \u00a0<strong>Federalism in the United States<\/strong>\u00a0is the constitutional division of power between\u00a0<a title=\"U.S. state\" href=\"https:\/\/en.wikipedia.org\/wiki\/U.S._state\">U.S. state<\/a>\u00a0governments and the\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States\">federal government of the United States<\/a>. The argument of which should hold more power has dominated the federalism debate, with the\u00a0<a title=\"Republican Party (United States)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Republican_Party_(United_States)\">Republican Party<\/a> traditionally favoring\u00a0strong state governments and weak federal government and the\u00a0<a title=\"Democratic Party (United States)\" href=\"https:\/\/en.wikipedia.org\/wiki\/Democratic_Party_(United_States)\">Democratic Party<\/a>, the opposite.<\/p>\n<p>The federal government is composed of three distinct branches:\u00a0<a title=\"United States Congress\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Congress\">legislative<\/a> (the\u00a0<a title=\"United States Congress\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Congress\">Congress<\/a>), <a href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States#Executive_branch\">executive<\/a> (the\u00a0<a title=\"President of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/President_of_the_United_States\">president)<\/a>, and\u00a0<a title=\"Federal judiciary of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_judiciary_of_the_United_States\">judicial<\/a> (he\u00a0<a class=\"mw-redirect\" title=\"Federal Courts of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_Courts_of_the_United_States\">federal courts<\/a>)\u00a0whose powers are vested by the\u00a0<a class=\"mw-redirect\" title=\"United States Constitution\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Constitution\">U.S. Constitution.<\/a><\/p>\n<p>State governments have the greatest influence over most Americans&#8217; daily lives. The\u00a0<a title=\"Tenth Amendment to the United States Constitution\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tenth_Amendment_to_the_United_States_Constitution\">Tenth Amendment<\/a>\u00a0prohibits the federal government from exercising any power not delegated to it by the Constitution; as a result, states handle the majority of issues most relevant to individuals within their jurisdiction. Because state governments are not authorized to print currency, they generally have to raise revenue through either taxes or bonds. As a result, state governments tend to impose severe budget cuts or raise taxes any time the economy is faltering.<\/p>\n<p>The\u00a0<strong>Department of the Treasury<\/strong>\u00a0(<strong>USDT<\/strong>)<sup id=\"cite_ref-isbn0313245789-pp275_2-0\" class=\"reference\"><\/sup>\u00a0is the\u00a0<a title=\"Treasury\" href=\"https:\/\/en.wikipedia.org\/wiki\/Treasury\">national treasury<\/a>\u00a0of the\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States\">federal government of the United States<\/a>\u00a0where it serves as an\u00a0<a title=\"United States federal executive departments\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_federal_executive_departments\">executive department<\/a>. The USDT\u00a0<a title=\"Tax collector\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax_collector\">collects<\/a>\u00a0all\u00a0<a title=\"Taxation in the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Taxation_in_the_United_States\">federal taxes<\/a>\u00a0through the\u00a0<a title=\"Internal Revenue Service\" href=\"https:\/\/en.wikipedia.org\/wiki\/Internal_Revenue_Service\">Internal Revenue Service<\/a>; manages\u00a0<a title=\"United States Treasury security\" href=\"https:\/\/en.wikipedia.org\/wiki\/United_States_Treasury_security\">U.S. government debt instruments<\/a>;\u00a0<a title=\"Bank regulation\" href=\"https:\/\/en.wikipedia.org\/wiki\/Bank_regulation#Licensing_and_supervision\">licenses and supervises banks<\/a>\u00a0and\u00a0<a title=\"Savings and loan association\" href=\"https:\/\/en.wikipedia.org\/wiki\/Savings_and_loan_association\">thrift institutions<\/a>; and advises the\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States#Legislative_branch\">legislative<\/a>\u00a0and\u00a0<a title=\"Federal government of the United States\" href=\"https:\/\/en.wikipedia.org\/wiki\/Federal_government_of_the_United_States#Executive_branch\">executive branches<\/a>\u00a0on matters of\u00a0<a title=\"Fiscal policy\" href=\"https:\/\/en.wikipedia.org\/wiki\/Fiscal_policy\">fiscal policy<\/a>.<\/p>\n<p class=\"q-text qu-display--block\">The\u00a0<a href=\"https:\/\/www.thebalance.com\/the-federal-reserve-system-and-its-function-3306001\">Federal Reserve<\/a> or the Fed is America&#8217;s central bank. Its job is to manage the U.S. money supply. For that reason, many people say the Fed prints money.\u00a0That doesn&#8217;t mean the Fed has a printing press that cranks out dollars. Only the\u00a0<a href=\"https:\/\/www.thebalance.com\/u-s-department-of-treasury-what-it-does-and-its-effect-3305998\">U.S. Department of the Treasury<\/a> does that. In other words, the U.S. Treasury Department prints the money, but it&#8217;s the Federal Reserve Banks that controls and distribute it.<\/p>\n<p class=\"q-text qu-display--block\">Each of the 12 Federal Reserve Banks keeps an inventory of cash on hand to meet the needs of the depository institutions in its District. The Treasury Department has two divisions that produce the cash: the Bureau of Engraving and Printing, which prints currency, and the United States Mint, which makes coins. So, yes, technically and logistically speaking it is the Treasury Department that physically creates (prints and mints) the money, but it&#8217;s up to the Fed to decide how much of it they want to distribute it. In addition, the Fed can increase or decrease the money supply without actually printing any money. This is part of their monetary policy. As a result, most economists refer to the Fed as &#8220;printing&#8221; or creating the money not to the Treasury.<\/p>\n<p>What is the difference between Fiscal and Monetary Policy?<\/p>\n<p>In Short: Monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the tax and spending policies of the federal government. Fiscal policy decisions are determined by the Congress and the Administration; the Fed plays no role in determining fiscal policy.<\/p>\n<p>Learning the difference between fiscal policy and monetary policy is essential to understanding who does what when it comes to the federal government and the Federal Reserve. The short answer is that Congress and the administration conduct fiscal policy, while the Fed conducts monetary policy.<\/p>\n<p>Both types of policy can have a significant effect on our everyday lives, but the lines between them can seem blurry to the average consumer. Let\u2019s sort it out.<\/p>\n<p>Monetary Policy Is the Federal Reserve\u2019s Role<\/p>\n<p>The word \u201cmonetary\u201d means having to do with money. And monetary policy is the wheelhouse of a central bank. How does the Federal Reserve conduct monetary policy? It can do so by influencing the supply of money in the economy, as well as influencing interest rates in markets.<\/p>\n<p>To influence the money supply and interest rates, the Fed has various tools. Some key ones include:<\/p>\n<ul>\n<li>Open market operations<\/li>\n<li>The discount rate<\/li>\n<li>Reserve requirements<\/li>\n<li>Interest on reserve balances<\/li>\n<\/ul>\n<p>Fiscal Policy Is the Federal Government\u2019s Role<\/p>\n<p>The word \u201cfiscal\u201d relates to public treasury or revenues. Fiscal policy<strong>\u00a0<\/strong>is a broad term used to refer to the tax and spending policies of the federal government. Fiscal policy refers to government spending and taxing decisions. Economics textbooks and various economic models usually think of fiscal policy in terms of the size of the government budget deficit, the difference between what the government spends and its revenue.<\/p>\n<p><img decoding=\"async\" src=\"https:\/\/www.stlouisfed.org\/~\/media\/Blog\/2018\/October\/OVBlogImage_Monetary_v_Fiscal.png?la=en\" alt=\"image\" \/><\/p>\n<p>In short, fiscal policy\u00a0is the use of\u00a0<a title=\"Government revenue\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_revenue\">government revenue<\/a>\u00a0collection (<a title=\"Tax\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax\">taxes<\/a>\u00a0or\u00a0<a class=\"mw-redirect\" title=\"Tax cuts\" href=\"https:\/\/en.wikipedia.org\/wiki\/Tax_cuts\">tax cuts<\/a>) and\u00a0<a title=\"Government spending\" href=\"https:\/\/en.wikipedia.org\/wiki\/Government_spending\">expenditure<\/a>\u00a0to influence a country&#8217;s economy. Fiscal policy is when governments at <strong>all levels<\/strong> (federal, state, or local) are adjusting their taxes, subsidies, or expenditures. But when it comes to the mainstream political debates, we are typically focusing on the federal government. These are precisely the issues that are covered in public finance and public economics.<\/p>\n<p>On the other had, monetary policy conducted via the Fed by fixing the money supply is a macroeconomic topic typically addresses in a class on Money and Banking and Financial Economics.\u00a0 <strong>This will NOT be the focus of this class!\u00a0\u00a0<\/strong><\/p>\n<p><span style=\"background-color: #fbeeb8\">Efficiency vs Equity<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><strong>Few questions to consider:<\/strong><\/p>\n<p><strong>What is the role of the government in the economy?<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"author":59125,"menu_order":1,"template":"","meta":{"_candela_citation":"[]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[47],"contributor":[],"license":[],"class_list":["post-292","chapter","type-chapter","status-publish","hentry","chapter-type-standard"],"part":84,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/pressbooks\/v2\/chapters\/292","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/wp\/v2\/users\/59125"}],"version-history":[{"count":1,"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/pressbooks\/v2\/chapters\/292\/revisions"}],"predecessor-version":[{"id":363,"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/pressbooks\/v2\/chapters\/292\/revisions\/363"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/pressbooks\/v2\/parts\/84"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/pressbooks\/v2\/chapters\/292\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/wp\/v2\/media?parent=292"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/pressbooks\/v2\/chapter-type?post=292"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/wp\/v2\/contributor?post=292"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-oldwestbury-publicfinanceandpublicpolicy\/wp-json\/wp\/v2\/license?post=292"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}