{"id":54,"date":"2026-02-05T19:04:17","date_gmt":"2026-02-05T19:04:17","guid":{"rendered":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/?post_type=chapter&p=54"},"modified":"2026-08-17T19:22:13","modified_gmt":"2026-08-17T19:22:13","slug":"ch-6-economics","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/chapter\/ch-6-economics\/","title":{"rendered":"CH 6 – Economics"},"content":{"raw":"

Introduction<\/h1>\r\n

Why Everything Costs So Much and Who Decided That<\/h3>\r\n
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You are standing in line for a concert. The ticket face value was $85. By the time you checked out on Ticketmaster, it was $200. By the time you looked on StubHub the night of the show, someone was asking $450 for the same seat.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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Nothing about the concert changed. Same artist. Same venue. Same seat. So why did the price triple?<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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Or think about this. Gas prices were relatively stable for months, then one week they jumped 40 cents overnight. Nobody announced a shortage. Nobody warned you. It just happened.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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Or this one. Your parents tell you they paid $400 a semester for college<\/a>. You are paying 20 times that. The buildings are the same. The professors are still just people standing at the front of a room talking. So, what happened?<\/a><\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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These are not random events. They are economics in action. And once you understand the forces behind them, the world starts to make a whole lot more sense.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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Economics is not just a class you have to pass. It is the invisible rulebook that governs every price tag, every job market, every financial decision you will ever make. Understanding it does not just make you a better student. It makes you a smarter consumer, a more informed citizen, and honestly, just a person who is harder to rip off.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n

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Let's get into it.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n\r\n

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CHAPTER OUTLINE<\/p>\r\n

6.1: What Is Economics and Why Should You Care?<\/strong><\/p>\r\n

Microeconomics vs. Macroeconomics<\/p>\r\n

6.2: Scarcity and Trade-offs: The Foundation of Everything<\/strong><\/p>\r\n

Unlimited wants, limited resources <\/span><\/p>\r\n

Trade-offs and opportunity cost<\/span><\/p>\r\n

6.3:. Supply and Demand: The Engine of the Economy<\/strong><\/p>\r\n

Driving factors of Supply \/ Demand<\/p>\r\n

Equilibrium<\/p>\r\n

6.4: Types of Economic Systems<\/strong><\/p>\r\n

Command Economy, Market Economy, Mixed Economy<\/span><\/p>\r\n

6.5: Competition and Market Structures<\/strong><\/p>\r\n

Perfect competition, monopoly, oligopoly, monopolistic competition<\/span><\/p>\r\n

6.6: The Role of Government in the Economy<\/strong><\/p>\r\n

Why governments get involved <\/span><\/p>\r\n

Taxes, regulations, and public goods <\/span><\/p>\r\n

Brief intro to fiscal policy: government spending and taxation<\/span><\/p>\r\n

6.7: Macroeconomics: The Big Picture<\/strong><\/p>\r\n

GDP: what it is and why it matters <\/span><\/p>\r\n

Unemployment: types and what they mean <\/span><\/p>\r\n

Inflation: what it is, why it happens, and why your dollar buys less than it used to<\/span><\/p>\r\n

6.8: Personal Economics: What This Means for You<\/strong><\/p>\r\n

How economic principles show up in your everyday financial decisions<\/p>\r\n

Budgeting as an economic choice<\/p>\r\n

Interest rates, student loans, and the cost of borrowing<\/p>\r\n

Why understanding economics makes you a smarter consumer, worker, and citizen<\/p>\r\n\r\n<\/div>\r\n \r\n\r\n<\/div>\r\n<\/div>\r\n \r\n

6.1: What Is Economics and Why Should You Care?<\/h1>\r\n

Here is the simplest definition of economics you will ever hear:\u00a0<\/span>economics<\/strong>\u00a0<\/span>is the study of how people make choices when they cannot have everything they want.<\/p>\r\n

That is it. At its core, economics is not really about money. It is about decisions.\u00a0<\/span>How do individuals decide what to buy? How do businesses decide what to charge? How do governments decide where to spend?<\/em>\u00a0<\/span>Every one of those questions is an economics question, and they all connect back to the same fundamental problem: there is never enough of everything to go around.<\/p>\r\n

Economics breaks down into two main branches, and understanding the difference between them will help you make sense of everything that follows.<\/p>\r\n\r\n\r\n

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Side by Side Comparison<\/strong><\/h2>\r\n
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Microeconomics<\/th>\r\nMacroeconomics<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
Focuses on individuals, households, and businesses<\/td>\r\nFocuses on entire economies and countries<\/td>\r\n<\/tr>\r\n
Why does a coffee cost $7 at one place and $2 at another?<\/td>\r\nWhy is inflation rising across the whole country?<\/td>\r\n<\/tr>\r\n
How does your college decide what to charge for tuition?<\/td>\r\nWhat is the national unemployment rate?<\/td>\r\n<\/tr>\r\n
Should you take the job or stay in school?<\/td>\r\nHow does a recession affect millions of workers?<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n\r\n
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Microeconomics<\/strong>\u00a0<\/span>zooms in. It looks at the individual decisions made by people, households, and businesses. When you decide whether to cook at home or order DoorDash, that is a microeconomic decision. When a local coffee shop decides whether to raise its prices, that is microeconomics. When Nike figures out how many pairs of a limited sneaker to produce, that is microeconomics.<\/p>\r\n

Macroeconomics<\/strong>\u00a0<\/span>zooms out. It looks at the economy as a whole.\u00a0<\/span>How is the entire country doing financially? Are people employed? Are prices rising? Is the economy growing or shrinking?<\/em>\u00a0<\/span>These are macroeconomic questions, and the answers affect everyone whether they are paying attention or not.<\/p>\r\n

Think of it this way. Microeconomics is you figuring out how to stretch your $50 until payday. Macroeconomics is the reason that $50 buys less than it did two years ago.<\/p>\r\n

Both matter. And throughout this chapter, you will see how the big picture and the small picture are constantly connected.<\/p>\r\n\r\n\r\n

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6.2: Scarcity and Trade-offs: The Foundation of Everything<\/h1>\r\nHere is the most important idea in all of economics, and it fits in one sentence:\r\n

People have unlimited wants. Resources are limited. That gap is the whole problem.<\/strong><\/span><\/h5>\r\nThis is called\u00a0<\/span>scarcity<\/strong>, and it is the reason economics exists as a field in the first place. If there were enough of everything for everyone, there would be no need to study how choices get made. But there is never enough of everything. There is not enough time, money, land, oil, talent, or hours in the day. So people, businesses, and governments are constantly forced to choose.\r\n\r\nAnd every choice comes with a cost.\r\n
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Opportunity Cost: What You Give Up When You Choose<\/strong><\/h2>\r\nWhen economists talk about the cost of a decision, they are not just talking about the price tag. They are talking about what you give up by making that choice. That is called opportunity cost, and it is one of the most powerful ideas in economics.\r\n\r\nHere is a simple example. You have a Saturday free. You could pick up a shift at work and earn $80, or you could go to a friend\u2019s birthday party. If you go to the party, the opportunity cost is the $80 you did not earn. If you take the shift, the opportunity cost is the experience and connection you missed at the party.\r\n\r\nThe dollar amount did not show up on any price tag. But it was absolutely a cost.\r\n\r\nNow scale that up to one of the biggest decisions of your life. Should you go to college or go straight into the workforce after high school?\r\n\r\nIf you go to college, you are paying tuition, yes. But you are also giving up four years of potential full-time income. That lost income is part of the real cost of your education, even though nobody bills you for it.\r\n\r\nIf you skip college and start working, you might earn money now. But you could be giving up higher lifetime earnings, career opportunities, and other long-term benefits that a degree might have unlocked.\r\n\r\nNeither choice is automatically right or wrong. But understanding opportunity cost means you are making the decision with your eyes open, accounting for what you are actually giving up, not just what shows up on a price tag or a paycheck.\r\n
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Trade-offs Are Everywhere<\/strong><\/h2>\r\nEvery budget decision is a\u00a0<\/span>trade-off<\/strong>. You have $200 for the month after your fixed expenses. You could spend it on going out with friends, save it, put it toward a new laptop, or use it to pay down debt. Whatever you choose, you are giving something else up. That is a trade-off.\r\n\r\nGovernments face trade-offs too. Every dollar spent on one program is a dollar not spent on another. More money for road construction might mean less money for education funding. More tax cuts might mean less spending on public services.\r\n\r\nThe point is not to stress you out about every decision. The point is to recognize that choices have costs beyond what is visible on the surface. The more clearly you see those costs, the better your decisions will be.\r\n\r\n\"tradeoffs\r\n
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Closing Thought<\/strong><\/h2>\r\nEvery price tag you have ever looked at, every job you will ever apply for, every loan you will ever consider, every political debate you will ever hear about taxes or spending or trade, all of it runs on economic principles.\r\n\r\nScarcity is real. Choices have costs beyond their price tags. Markets respond to incentives in predictable ways. Governments step in when markets fall short. Economies rise and fall in cycles. And every personal financial decision you make is a small piece of a much larger system.\r\n\r\nEconomics is not a subject you study and forget. It is the operating system running underneath your financial life, the job market you are entering, the prices you pay every day, and the policy debates that will shape the world you live in for decades to come.\r\n\r\nUnderstanding it does not just make you a better student. It makes you a smarter, more empowered person.\r\n\r\nAnd that is worth a lot more than any price tag.\r\n\r\n
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6.3: Supply and Demand: The Engine of the Economy<\/h1>\r\n<\/header>If there is one concept that people think of when they hear the word economics, it is supply and demand. And for good reason. Supply and demand explains more about why prices are what they are than almost any other single idea.\r\n\r\nLet\u2019s break it down simply.\r\n
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Demand: What People Want to Buy<\/strong><\/h2>\r\nDemand<\/strong>\u00a0<\/span>refers to how much of something consumers are willing and able to buy at various price points. The key word there is \u201cable.\u201d Want does not equal demand in economics. Demand requires both the desire for something and the ability to pay for it.\r\n\r\nHere is the core principle: when prices go up, demand typically goes down. When prices go down, demand typically goes up. This is called the\u00a0<\/span>law of demand<\/strong>, and it makes intuitive sense. If your favorite restaurant doubles its prices overnight, you are going to go there less. If it cuts prices in half, you are probably going more often.\r\n\r\nBut price is not the only thing that drives demand. Several other factors matter too.\r\n\r\nConsumer income matters. When people have more money, they tend to buy more of most things. When money is tight, spending pulls back.\r\n\r\nTastes and trends matter. Remember when everyone suddenly needed a Stanley cup? That was a shift in consumer taste driving up demand with no change in price.\r\n\r\nThe price of related goods matters too. If the price of beef skyrockets, demand for chicken tends to go up as people substitute one for the other.\r\n
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Supply: What Businesses Are Willing to Sell<\/strong><\/h2>\r\nSupply<\/strong>\u00a0<\/span>refers to how much of something producers are willing and able to offer for sale at various price points. The core principle here is the opposite of demand: when prices go up, producers typically want to supply more. Higher prices mean higher potential profits, so businesses have more incentive to produce.\r\n\r\nThink about sneaker launches. When a limited-edition Air Jordan sells out immediately and resale prices shoot up to $400, what happens? Nike takes note. They start producing more of that style. Other brands rush to create similar products. Supply responds to the signal that prices are high and demand is strong.\r\n\r\nSeveral factors affect supply beyond price. The cost of production matters enormously. If the raw materials needed to make a product get more expensive, it costs more to produce that product, and supply may shrink. Technology matters too. Better technology usually makes production cheaper and more efficient, which tends to increase supply. And the number of sellers in the market matters. More competition typically means more supply.\r\n
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Example<\/p>\r\n\r\n<\/header>\r\n

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During the COVID-19 pandemic, the demand for home gaming setups exploded. Everyone was stuck at home and wanted a PlayStation 5 or a new graphics card. At the same time, supply chains were disrupted, factories were shut down, and the supply of those products dropped dramatically. Demand shot up. Supply crashed. What happened to prices? They went through the roof. A PS5 that retailed for $500 was selling for $1,000 or more on resale markets because demand far outpaced supply.<\/div>\r\n<\/div>\r\n<\/div>\r\n \r\n\r\n<\/div>\r\n \r\n\r\n<\/header><\/div>\r\n

How Supply and Demand Work Together<\/strong><\/h3>\r\nSupply and demand do not operate independently. They interact constantly, and that interaction determines prices.\r\n\r\nWhen the amount consumers want to buy exactly equals the amount producers want to sell, the market is in\u00a0<\/span>equilibrium<\/strong>. The price at that point is called the equilibrium price, and it is essentially the price the market settles on naturally when left to function freely.\r\n\r\nBut markets are always shifting.\r\n\r\nWhen demand exceeds supply, prices rise. When supply exceeds demand, prices fall. That relationship plays out in every market, every day, whether you are buying sneakers, streaming subscriptions, gasoline, or groceries.\r\n
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More Quick Real-World Examples<\/strong><\/h3>\r\n<\/header>\r\n
\r\n\r\nConcert tickets.<\/strong>\u00a0<\/span>An artist announces a tour. Millions of fans want tickets. There are only so many seats in the venue. Supply is fixed and low. Demand is massive. Price goes up, sometimes dramatically.\r\n\r\nGas prices.<\/strong>\u00a0<\/span>Oil producing countries reduce output. Less oil means less gasoline. Supply drops. With the same number of drivers on the road, demand stays constant. Price at the pump rises.\r\n\r\nStreaming services.<\/strong>\u00a0<\/span>When Netflix was the only major streaming platform, it had near-total control. As Disney Plus, HBO Max, Peacock, and others launched, supply of streaming options increased dramatically. Prices have had to stay competitive because consumers now have alternatives.\r\n\r\n<\/div>\r\n<\/div>\r\n\r\n
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6.4: Types of Economic Systems<\/h1>\r\nEvery country in the world has to answer the same fundamental economic questions.\r\n\r\nWhat gets produced?<\/span>\r\n\r\nHow much of it gets made?<\/span>\r\n\r\nWho gets to have it?<\/span>\r\n\r\nHow is it distributed?<\/span>\r\n\r\n \r\n\r\n \r\n\r\n \r\n\r\n \r\n\r\nThe answer to those questions depends on what kind of economic system a country uses. There are three basic types, and most real countries fall somewhere in between them.\r\n
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Command Economy<\/h2>\r\nIn a\u00a0<\/span>command economy<\/strong>, the government makes the major economic decisions. The government decides what gets produced, how much of it gets made, and who gets it. Private ownership is limited or nonexistent. Businesses do not compete for customers the way they do in a free market, because the government controls the means of production.\r\n\r\nA command economy tries to use resources for everyone, instead of just a few wealthy people.\u00a0<\/span>However, in reality, these economies often have trouble with inefficiency, shortages, and a lack of new ideas because there\u2019s no competition to encourage improvement.<\/em>\r\n\r\nNorth Korea is one of the most extreme examples of a command economy operating today. Cuba and, historically, the Soviet Union are other examples.\r\n
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Market Economy<\/strong><\/h2>\r\nIn a\u00a0<\/span>pure market economy,<\/strong>\u00a0<\/span>economic decisions are made by individuals and businesses through the forces of supply and demand, with little to no government involvement. Prices are set by the market. Businesses compete for customers. People are free to buy, sell, and start companies as they choose.\r\n\r\nThe driving force in a market economy is the profit motive. Businesses produce what consumers want because doing so is profitable, and they stop producing things nobody wants because there is no money in it. In theory, this creates an efficient system that naturally directs resources toward what people value most.\r\n\r\nNo country operates a perfectly pure market economy. But the United States, Canada, and most of Western Europe lean heavily in this direction.\r\n
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Mixed Economy<\/strong><\/h2>\r\nA\u00a0<\/span>mixed economy<\/strong>\u00a0<\/span>combines elements of both. The market drives most economic activity, but the government steps in to regulate certain industries, provide public goods and services, and address situations where the free market produces unfair or harmful outcomes.\r\n\r\nThe United States is a mixed economy. Most goods and services are produced by private businesses competing in the market. But the government also funds public schools, builds highways, regulates food safety, sets minimum wage laws, and provides social programs like Social Security and Medicaid. The mix of government and market varies from one country to another and is often the source of significant political debate.\r\n\r\n \r\n\r\n\"comparing\r\n\r\nMarket Vs Mixed Vs Command Economies Explained | What is the difference between Market Mixed Command<\/a>\r\n\r\n
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6.5 Competition and Market Structures<\/h1>\r\n<\/header>Not all markets work the same way. The level of competition in a market has a huge effect on prices, quality, and consumer choice. Economists describe market competition using four basic structures.\r\n
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Perfect Competition<\/strong><\/h2>\r\nIn a perfectly competitive market, there are many sellers offering identical products, prices are determined entirely by supply and demand, and no single seller has any real power to influence the market. Entry and exit are easy, meaning new businesses can join the market without major barriers.\r\n\r\nPerfect competition is mostly a theoretical concept. The closest real-world examples tend to be commodity markets like wheat, corn, or crude oil, where the product is essentially identical regardless of who produces it, and no single producer controls the price.\r\n\r\n<\/div>\r\n \r\n
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Monopoly<\/strong><\/h2>\r\nAt the opposite extreme is a monopoly, where a single seller controls the entire market for a product or service. With no competition, a monopoly can set prices as high as it wants, knowing consumers have no alternative.\r\n\r\nMonopolies are generally considered harmful to consumers because they lead to higher prices and lower quality. That is why governments in most countries have laws designed to prevent monopolies from forming or to regulate them when they do.\r\n\r\nA classic example is utility companies. In most cities, there is one electric company, one water provider, and one natural gas supplier. You cannot choose a competing provider. Because of this, the government regulates what those companies can charge.\r\n
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Oligopoly<\/strong><\/h2>\r\nAn oligopoly exists when a small number of large companies dominate a market. Each company is big enough that its decisions affect the others, so they pay close attention to what their competitors are doing.\r\n\r\nYou interact with oligopolies constantly. The airline industry is a good example. A handful of major carriers, American, Delta, United, Southwest, control the vast majority of domestic flights. The smartphone market is another. Essentially two companies, Apple and Google through Android, power almost every phone on the planet.\r\n\r\nIn an oligopoly, competition exists but it is limited. Prices tend to be similar across companies because no one wants to start a price war they might lose. Competition tends to happen more through product features, marketing, and customer experience than through price alone.\r\n\r\n<\/div>\r\n \r\n
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Monopolistic Competition<\/strong><\/h2>\r\nMonopolistic competition is the structure most similar to your everyday consumer experience. There are many sellers, but each one offers a product that is at least slightly different from the others. Businesses compete on price, quality, branding, and experience.\r\n\r\nThink about coffee shops. There are dozens of them in most cities, ranging from massive chains like Starbucks to small independent cafes. They all sell coffee, but each one is differentiated by its brand, atmosphere, menu, and experience. A customer who prefers the vibe of a local indie shop might pay more there than they would at a chain. That differentiation gives each seller some control over their pricing.\r\n\r\nRestaurants, clothing brands, hair salons, and gyms all tend to operate in monopolistically competitive markets.\r\n\r\n<\/div>\r\n \r\n\r\n\"quadrant\r\n\r\n
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6.6 The Role of Government in the Economy<\/h1>\r\n<\/header>Even in a market-driven economy like the United States, the government plays a significant role. And understanding why governments get involved in the economy in the first place helps make sense of a lot of policy debates you will hear throughout your life.\r\n\r\n \r\n\r\nWhy Government Gets Involved<\/strong>\r\n\r\nThe free market is remarkably good at allocating resources efficiently in many situations. But it does not always produce outcomes that are fair, safe, or beneficial for society as a whole. That is where government steps in.\r\n
During the 2008 financial crisis, for example, the U.S. government stepped in to bail out major automakers like General Motors and Chrysler, which were on the brink of collapse. The government provided loans and financial assistance to keep these companies afloat, saving millions of jobs in the auto industry and related sectors.\r\nIn return, the companies had to restructure, cut costs, and repay the loans. Over time, the auto industry recovered, and the government eventually got most of its money back, although the bailout was controversial at the time.<\/div>\r\nThere are a few situations where most economists agree government involvement makes sense.\r\n\r\nPublic goods<\/strong>\u00a0<\/span>are things that everyone benefits from but that the market would not provide on its own because there is no profit in it.\u00a0<\/span>National defense, public roads, clean air regulations, and public street lighting are examples.<\/em>\u00a0<\/span>No private company is going to build a highway system and give everyone free access to it. The government does it because society benefits even though it is not profitable.\r\n\r\nExternalities<\/strong>\u00a0<\/span>happen when the actions of individuals or businesses create costs or benefits for others who had no say in the decision.\u00a0<\/span>Pollution is the classic example of a negative externality. A factory that dumps chemicals into a river benefits from lower production costs, but everyone who lives downstream bears a cost they never agreed to.<\/em>\u00a0<\/span>Government regulations exist to address these kinds of situations.\r\n\r\nMarket failures<\/strong>\u00a0<\/span>occur when the free market produces outcomes that are inefficient or harmful.\u00a0<\/span>Monopolies are a form of market failure, as are situations where one party in a transaction has dramatically more information than the other, like a used car dealer who knows far more about a vehicle\u2019s problems than the buyer does.<\/em>\r\n
\"\"<\/a><\/div>\r\nTaxes, Spending, and Fiscal Policy<\/strong>\r\n\r\nThe government influences the economy primarily through two tools: taxation and spending. Together, these make up what economists call\u00a0<\/span>fiscal policy.<\/strong>\r\n\r\n \r\n\r\n\"\"<\/a>When the government collects taxes, it pulls money out of the private economy. When it spends money on programs, infrastructure, and services, it puts money back in. The balance between the two has significant effects on economic activity.\r\n\r\nDuring a recession, when the economy is shrinking and people are losing jobs, the government often increases spending and cuts taxes to stimulate economic activity and put more money in people\u2019s hands. During periods of strong growth when inflation is a concern, the government may do the opposite.\r\n\r\nA relatable example: the stimulus checks sent out during the COVID-19 pandemic were a form of fiscal policy. The government injected money directly into the economy to keep people spending and prevent an even deeper economic collapse.\r\n
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WONDERING WHERE YOUR TAX DOLLARS GO?<\/p>\r\n\r\n<\/header>\r\n

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Federal Spending Breakdown<\/b><\/span><\/span><\/h2>\r\n \r\n
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