Topic Quiz: Economics

The Fair Labor Standards Act of 1938, signed by President Franklin D. Roosevelt, created the first national minimum wage: 25 cents an hour. Since then, Congress has raised the minimum wage many times. The graph shows the rate in selected years when a new rate took effect.

The amounts are in the dollars of each year. They are not adjusted for inflation, the general rise in prices over time.

Source: U.S. Department of Labor, Wage and Hour Division, history of federal minimum wage rates.

Several small businesses rent kayaks by the hour at Pine Lake, a fictional summer lake. The graph and table show the demand (D) for kayak rentals and the supply (S) of kayak rentals on a typical summer day.

(1) Three years ago, a shipyard reopened in Ferris Valley, a fictional river town, and two pipeline projects began nearby. Within a year, employers had posted about 900 openings for welders. At the time, the valley had about 1,200 working welders, and many of them were close to retirement.

(2) Since then, the average pay for welders in the valley has climbed from $24 to $29 per hour. Several employers now offer signing bonuses to experienced welders who move to the area.

(3) The shipyard's owner, Dana Reyes, risked her own savings to reopen the yard. With help from investors, she bought new welding machines and two large cranes. Steel plates arrive by barge on the river.

(4) Next fall, Ferris Valley Community College will open a nine-month welding program. The college expects about 300 new welders to graduate each year once the program is running. Employers say they will keep hiring as long as the shipyard and pipelines stay busy.

The town, people, and figures are fictional.

(1) When the economy slows down or prices rise too fast, the federal government has two main sets of tools. Each is controlled by a different part of the government.

(2) Fiscal policy is the use of government spending and taxes. It is decided by Congress and the President through the federal budget and tax laws. During a recession, the government may use expansionary fiscal policy: increasing spending on things like roads and unemployment benefits, or cutting taxes so families have more money to spend. When the economy is overheating, it may do the reverse—cutting spending or raising taxes. Spending more than the government collects in taxes creates a budget deficit, which adds to the national debt.

(3) Monetary policy is the management of the money supply and interest rates. It is run by the Federal Reserve, the central bank of the United States, created by Congress in 1913. The Fed's main tool is its target for the federal funds rate—the interest rate banks charge one another for overnight loans. Changes in this rate ripple out to the rates people pay on car loans, credit cards, mortgages, and business loans. The Fed also buys and sells government bonds; buying bonds adds money to the banking system, and selling bonds removes it.

(4) Congress has given the Fed two main goals: maximum employment and stable prices. To fight a recession, the Fed lowers interest rates, which makes borrowing cheaper and encourages spending and hiring. To fight high inflation, the Fed raises interest rates. Higher rates make borrowing more expensive, so households and businesses spend less, and the slower spending eases the pressure on prices.

(1) Wars have many causes—political, religious, ideological. But economic pressures have often pushed nations toward war.

(2) War of 1812. In the early 1800s, Britain and France were at war. Each tried to stop neutral countries from trading with the other. The British navy seized American merchant ships bound for France and forced thousands of American sailors into British service, a practice called impressment. Congress tried the Embargo Act of 1807, which banned American exports, but it hurt American farmers and merchants far more than it hurt Britain. In 1812, the United States declared war, demanding "free trade and sailors' rights."

(3) World War I. When war broke out in Europe in 1914, the United States was officially neutral, but American trade with Britain and France soared, and American banks lent the Allies large sums. Germany used submarines to cut off that trade. In early 1917 Germany announced unrestricted submarine warfare, meaning it would sink ships—including American ones—heading toward Britain. In April 1917, the United States entered the war.

(4) World War II in the Pacific. Japan had few natural resources of its own and imported most of its oil, much of it from the United States. In the 1930s Japan invaded China, partly to gain raw materials and markets. In the summer of 1941, after Japan moved into French Indochina, the United States froze Japanese assets and cut off oil exports to Japan. Japanese leaders decided to seize the oil-rich Dutch East Indies and, to keep the U.S. Navy from interfering, attacked Pearl Harbor on December 7, 1941.

(1) Merrow Valley is a fictional river valley in New England. Its story is typical of many places that industrialized in the 1800s. Textile mills and machine shops opened along the river, and later along the railroad, and they hired thousands of workers—young people from nearby farms, families from other states, and immigrants from Ireland, Quebec and elsewhere.

(2) The graph shows how many people in the valley worked on farms and in factories in each census year.

Excerpt A is from England's Treasure by Forraign Trade by Thomas Mun, an English merchant, published in 1664. Excerpt B is from The Wealth of Nations by the Scottish economist Adam Smith, published in 1776. The original spelling is kept. ("Forraign" = foreign; "wee" = we; "strangers" = foreigners; "treasure" = gold and silver.)

Excerpt A — Thomas Mun (1664)

(1) Although a Kingdom may be enriched by gifts received, or by purchase taken from some other Nations, yet these are things uncertain and of small consideration when they happen. The ordinary means therefore to increase our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value. … By this order duly kept in our trading, we may rest assured that the kingdom shall be enriched yearly two hundred thousand pounds, which must be brought to us in so much Treasure; because that part of our stock which is not returned to us in wares must necessarily be brought home in treasure….

Excerpt B — Adam Smith (1776)

(2) The land was good and of great extent, and the cultivators having plenty of good ground to work upon, and being for some time at liberty to sell their produce where they pleased, became in the course of little more than thirty or forty years (between 1620 and 1660) so numerous and thriving a people that the shopkeepers and other traders of England wished to secure to themselves the monopoly of their custom. …

(3) To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow-citizens to found and maintain such an empire. Say to a shopkeeper, "Buy me a good estate, and I shall always buy my clothes at your shop, even though I should pay somewhat dearer than what I can have them for at other shops"; and you will not find him very forward to embrace your proposal.

The Fair Labor Standards Act of 1938, signed by President Franklin D. Roosevelt, created the first national minimum wage: 25 cents an hour. Since then, Congress has raised the minimum wage many times. The graph shows the rate in selected years when a new rate took effect.

The amounts are in the dollars of each year. They are not adjusted for inflation, the general rise in prices over time.

Source: U.S. Department of Labor, Wage and Hour Division, history of federal minimum wage rates.