Kelci Winters

Professor Kidd
Macroeconomics
24 April 2015
The United States: How our Economic System and Government Combine to Enhance and
Stabilize our Markets and Influence the World around Us
Introduction
In the Principles of Macroeconomics class, macroeconomics has been looked at by
learning the different ways an economy can be changed. McConnell, Brue and Flynn define
macroeconomics as the part of economics concerned with the economy as a whole; with such
major aggregates as the household, business, and government sectors, (G-16). The economy
does not always run exactly how it is planned, so there are economic systems. An economic
system is defined as a particular set of institutional arrangements and a coordinating mechanism
for solving the economizing problem; two general types of economic systems are the market
and command systems (G-7). Economic systems are institutions to help economic problems, but
there are also social institutions that are put in place to help society and its problems. Kimberly
Devore defines social institutions as established sets of norms and subsystems [such as
economic, governmental, family, educational and religious] that support each societys survival.
Economic systems and social institutions are both put into place to help increase order and
structure, and decrease chaos. In the United States, the market system, otherwise known as
capitalism, is the main structure of the economy. Capitalism gives society the flexibility to
adapt to the ever-changing economic cycles of various societies [and allows] individuals who

provide consumable goods and services gain profit (Goodwin). Throughout this paper there
will be an evaluation of the United States and how the economic system and government
combine to enhance and stabilize the markets and the influence the world. The first evaluation
will be of macroeconomics and the relationship between social institutions and society.
Macroeconomics and the relationship between social institutions and a society
There is a direct relationship between social institutions and a society. When social
institutions are running properly and are organized, society runs properly with few issues. The
economic system of capitalism is a large part of a properly functioning society. Characteristics
of capitalism are private property, freedom of enterprise and choice, self-interest, competition,
markets and prices, technology and capital goods, specialization (division of labor), use of
money, and an active but limited government (McConnell 30-34). Private property is when
private individuals and firms, not the government, own most of the property resources (30).
Freedom of enterprise is the freedom to choose what products to create; while freedom of choice
is when owners can choose what they want to do with their property and money (31). Selfinterest is when each economic unit tries to achieve its own particular goal, which usually
requires delivering something of value to others (31). Competition is when there is more than
one buyer and seller, so the sellers want the best products for buyers to buy. A market is an
institution or mechanism that brings buyers and sellers into contact (32). Division of labor is
when people are given their jobs based on their strengths. Use of money is the medium of
exchange. Having an active but limited government, government can increase the overall
effectiveness of a market system in several ways (34). Each of these tenets of capitalism help to
show that the market system is a social institution that helps to keep society flowing properly.

There are five basic economic questions that the tenets of capitalism answer. The first
question is what goods and services will be produced? (34). This question is answered through
self-interest, freedom of enterprise and choice, and division of labor. People produce what they
believe others want to buy and people work on things they are good at to make products as good
as possible. How will the goods and services be produced? is the second economic question
(34). Division of labor answers this question because those who have strengths and interest
towards a certain good or service will want to work towards making that good or service. The
third question is who will get the goods and services? (34). Markets and prices, and freedom of
choice answer this question because markets bring buyers and sellers together, while people have
the choice to do whatever they want with their money. How will the system accommodate
change? is the fourth economic question (34). This is answered through division of labor,
competition, and self-interest. These answer the question because producers want to stay up to
date with their competition and people want to continue making the best products possible. The
final economic question is how will the system promote change? (34). This is through
competition because producers want to stay up to date will their competitors and want customers
to buy their products. These tenets may be able to answer economic questions, but the economy
is based on demand and supply of products, too. Demand is the amounts of a good or service
that buyers wish to purchase at various prices (G-5). Demand is based on those who want a
product. Supply is the amount of a good or service that sellers will offer at various prices (G27). Supply is based on how much a producer makes available at a certain time. There are social

institutions and economic theories that are put into place, but not all work how they are intended
to.
Macroeconomics and the relationship between social institutions to societal problems
The various economic systems put in place do not always work, sometimes there are still
problems in society. Such problems include unemployment rates and tax rates. The
unemployment rate is the percentage of the labor force unemployed at any time (G-29). There
needs to be some unemployment to keep people on their toes. Having too much or too little
unemployment is bad for the economy. Tax rates are another issue that society is sometimes
faced with. When tax rates are higher, people tend to spend less. People spending less is a
problem for the economy because there is no money flowing. There are two ways in which these
problems can occur, through market and command economies. A market economy is a system
where the government is active but limited. Market economies have two fundamental aspects of
market [which] are private ownership of the means of production and voluntary
exchanges/contracts (Investopedia). These economies have governments that do not say what
contracts t0 be a part of. The United States is a country most related to the market economy.
This ideal is drastically different from command economy. A command economy is known also
as central direction and/or planned economy (Investopedia). In a command economy,
governments own all of the factors of production such as land, capital and resources
(Investopedia). This, also, means that the government decides when products will be produced
and how much will be produced. The Soviet Union is a perfect example of a command
economy. Societal problems can be seen in the economy, economically improvements have
helped in solving those problems.

Macroeconomics and the historical evolution of social institutions

Like anything in nature, the economic methods used throughout the years have evolved.
There are two policies used in attempt to expand the economy. The first policy is fiscal policy,
which consists of deliberate changes in government spending and tax collections designed to
achieve full employment, control inflation, and encourage economic growth (McConnell 613).
Fiscal policy deals with financials and is based on the ideas of Keynesian economics. Keynesian
economics is the idea that government intervention can stabilize the economy (Jahan). The
government gets involved by increasing or decreasing the money it puts into the economy and
increasing or decreasing the amount tax payers have to pay on taxes. When the government feels
there is too much money flowing through the economy, they will decrease their spending and
increase taxes. On the other hand, when there is too little money flowing through the economy,
government increases spending and decreases taxes. The government increases their spending in
ways such as creating new buildings and highways. With the theory of Keynes, there is a theory
called Says Law. Says Law is a theory stating that supply creates its own demand (584). This
means that the amount supplied will be the amount that the people will want to buy. No matter
the amount that is offered, people will want to buy a certain product or service. The other type of
policy is called monetary policy. Monetary policy consists of deliberate changes in the money
supply to influence interest rates and thus the total level of spending in the economy
(McConnell 670). This policy has to do with banks and the amount of money that they let get
into the economy. Higher interest rates relate to a lot of money already circulating through the
system; when there are higher interest rates, there is a harder and less likely chance that people
will want and be able to take out loans from the bank. With this being said, lower interest rates

are when there is not enough money flowing through the economy. More people will want and
be able to take loans with lower interest rates because less money has to be paid when paying
back on the loans. These ideas can be seen in biggest economic crises the United States has
seen, the Great Depression and the Great Recession.
There are policies and theories used in the Great Depression and the Great Recession that
were beneficial and there are some that should have been used. The Great Depression occurred
in the 1930s. This was a time when real GDP declined by 27 percent [over a three year period]
and unemployment rate rocketed to nearly 25 percent (584). A quarter of the country went
without jobs for nearly a decade. During the Great Depression, the economy was disinvestingusing more capital than it is producing-and the nations stock of capital shrinks (490). This
meaning that there was a shortage of money flowing in the economy. During this depression, the
government should have put more money into the economy and lowered tax rates. The banks
should also have lowered interest rates. These ideals would have put more money into the
economy and more people would have wanted to use more money. The Great Recession has
similar aspects to the Great Depression but the consequences were not as harsh. Also called the
financial crisis, the Great Recession took place in late 2007 to early 2009. The Great Recession
was triggered by a steep decline in housing prices and a crisis involving mortgage loans and the
financial securities built on them (673). People were getting loans that should not have and
could not pay back their loans. This financial crisis altered the prior consumption and saving
behavior in the economy (554). Saving was increased and spending/consumption was
decreased. Fear was put into the people of the United States during the Great Recession and
people were scared to spend any money. During a recession like this, the best thing the

government can do is put money into the economy so that the people will spend and keep money
circulating through the economy. Banks were not getting money back on their loans, so stricter
tests should be done on individuals who want a loan. This way the bank knows they have a
better chance of getting their money back. The United States is not the only country with
depressions and recessions, this is a reason for trading internationally.
Macroeconomics and social institutions in a global context
Regardless of the country, trading is an essential part of economies internationally. There
are several reasons for trading, the most common reasons include quality, price, time and
availability of a product. Countries trade with each other when, on their own, they do not have
the resources, or capacity to satisfy their own needs and wants (ecnomicsonline). Not every
country can produce the highest quality goods or have the best crop; countries will make trades
to have the best products in their country. There are leagues in which countries trade goods, EU
and NAFTA are just two of them. EU is a shortened name for the European Union. This league
sought to reduce tariffs by creating regional free-trade zones (773). Tariffs are taxes put on
imports. A free-trade zone is where there are no government imposed barriers to trade with other
countries. EU is comprised of 27 European nations including France, Germany, Denmark and
the United Kingdom (773). The United States is not a part of the EU, but they are a part of
NAFTA. NAFTA stands for North American Free Trade Agreement. Mexico, Canada and the
United States are in the agreement. This agreement established a free-trade area that has about
the same combined output as the EU but encompasses a much larger geographic area (774).
Tariffs have also been eliminated between the countries in this agreement. These leagues and
agreements between countries are nice, but not every country is in an agreement with other

countries. Quotas and embargoes occur in some cases when countries are not in agreement with
others. A restriction on the number and/or amount of a good or service being traded are quotas.
This happens when countries have goods that they want to keep for themselves. Embargoes are
when the government restricts commerce or exchange with a certain country. The United States
not allowing any goods to be sent or traded with Cuba is an example of an embargo.
Conclusion
Through this research paper, an analysis of the United States and how the economic
system and government combine to enhance and stabilize the market and the surrounding world.
Social institutions are subgroups that have tasks that encourage society to work properly.
Different economic systems are in place to handle economic problems, if one system does not
work there are others to try out. The economic base set in the United States has not always been
there, evolution of the economy has occurred. Trading with other countries is one way that
countries stay up to date with others, countries have agreements to help make the trading process
as stress free as possible.

Works Cited
Devore, Kimberly (n.d.). Social Institutions: Definition, Examples and Quiz. Retrieved from
study.com. 19 April 2015.
Goodwin, Chuck (2015). Point: Capitalism is Still the Best Economic Alternative. Point of
View: Capitalism Vs. Socialism: 2. Web. 19 April 2015.
Investopedia.com (n.d.). Whats the difference between a market economy and a command
economy? Retrieved from investopedia.com. 20 April 2015.
Jahan, Sarwat (2014). What Is Keynesian Economics? Retrieved from imf.org. 21 April 2015.
McConnell, Campbell, Stanley Brue, and Sean Flynn. Economics, 19th Edition. New York:
Macmillan/Mcgraw-Hill, 2011. Print. 19-22 April 2015.
Why do countries trade? Retrieved from economicsonline.co.uk. 21 April 2015.