5.1 National Economic Policy Objectives
103
rates and foreign exchange markets. This is followed by a discussion of factors that determ-
ine exchange rate relationships and changes in those relationships over time. You will then
learn how the fi nancing of international trade takes place, including how exporters fi nance
with a draft or bill of exchange. Financing by the importer and the use of a commercial letter
of credit and a trust receipt are also covered. The last section will
introduce you to develop-
ments in international transactions as measured by balance-of-payments accounts. In Part 2
our focus will be on investments, including the securities and other fi nancial markets needed
to market and transfer fi nancial assets.
H O W T H I S C H A P T E R A P P L I E S TO M E . . .
The opportunity to vote gives you a way of infl uencing economic and political developments
in this country. The president and members of Congress are policy makers elected by the
people. After reading this chapter, you should have a better understanding of the national
economic policy objectives in the United States and how government offi
cials
and the Fed
infl uence the economy. You then will be in a more knowledgeable position to make informed
economic decisions about activities that may infl uence your life and career.
Government and private policy makers often are maligned in the press and sometimes even by
themselves. For example, President Ronald Reagan in 1986 said,
The government’s view of the economy could be summed up in a few short phrases:
If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
1
While this statement is somewhat
humorous to most of us, it also serves to start us thinking
about what should be the country’s broad-based economic objectives and what mechanisms
are needed for achieving these objectives. We need a system of checks and balances to ensure
that policy makers will operate in the best interests of the people of the United States. The
president and Congress pass laws and set fi scal policy, while the Fed sets monetary policy and
attempts to regulate the supply of money and the availability of credit.
5.1
National Economic Policy Objectives
Ernest Hemingway said,
The fi rst panacea for a mismanaged nation is infl ation of the currency; the
second is war. Both bring a temporary prosperity; both bring a permanent ruin.
Both are the refuge of political and economic opportunists.
2
Most of us would agree with Hemingway that currency infl ation and war are not accept-
able economic objectives. While people with diff ering views debate the proper role of gov-
ernment, there is broad agreement that decisions by government policy makers to levy taxes
and make expenditures signifi cantly aff ect the lives of each of us. In addition to the checks and
balances off ered by two political parties, the Fed is expected to operate
independently of the
government but also in the best interests of the country and its people. There is also a strong
tradition in the United States that national economic objectives should be pursued with min-
imum interference to the economic freedom of individuals.
The
Employment Act of 1946
and the
Full Employment and Balanced Growth Act of 1978
,
which is typically referred to as the
Humphrey-Hawkins Act
, spell out the role of the U.S.
government in carrying out the economic goals of economic growth and stable prices. Most
of us also would agree that economic growth is good if it leads to improved living standards
for the people. However, for this to occur, economic growth must be accompanied by stable
1
Address, White House
Conference on Small Business, August 15, 1986.
2
“Notes on the Next War: A Serious Topical Letter,”
Esquire
, September, 1935.
104
C H A PT E R 5 Policy Makers and the Money Supply
prices and high and stable employment levels. The relationship between the money supply and
demand aff ects the level of prices and economic activity in our market economy. Therefore,
the process by which the money supply is increased and decreased is a very important factor to
the success of the economy. Since we
live in a global environment, our economic well-being
also depends on achieving a reasonable balance in international trade and other transactions.
To summarize, our country’s economic policy actions are directed toward these three national
economic policy goals:
• Economic growth
• High employment
• Price stability
Accompanying these economic goals is also a desire for
stability in interest rates, fi nancial
markets, and foreign exchange markets.
Economic Growth
The standard of living of U.S. citizens has increased dramatically during the history of the
United States as a result of the growth of the economy and its productivity. Of course, growth
means more than merely increasing total output. It requires that output increase faster than
the population so that the average output per person expands. Growth is a function of two
components: an increasing stock of productive resources—the labor force and stock of capital—
and improved technology and skills.
The output of goods and services in an economy
is referred to as the
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