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government is divided into three branches: the legislative,
executive, and judicial. Each branch has an important
function:
■
The legislative branch makes laws.
■
The executive branch carries out laws.
■
The judicial branch interprets laws.
The U.S. Constitution also allows each branch to place
controls or limits on the power of the other two
branches, so that no one branch dominates. This frame-
work is called the system of checks and balances. For
example, the legislature (U.S. Congress) may pass a bill,
but before it can become law, the executive (the presi-
dent) must sign it. The president can refuse it by vetoing
it. However, Congress can still pass the bill into law—in
an action called overriding the veto—if two-thirds of its
members vote for it. (See table at bottom of this page.)
State and Local Governments
State governments resemble the framework of the federal
government. The governor acts as the chief executive and
can veto legislation. Most states have legislatures made of
two houses, and each state has its own court system, con-
stitution, and a system of checks and balances. Local gov-
ernments vary from the state and federal model. There
are three basic forms of local government:
Mayor-council—in this form, voters elect a
mayor as city or town executive and they elect
a council member from each specific ward.
Council-manager—in this form, voters elect

council members, who, in turn, hire a manager
to run the day-to-day operations of the city or
town.
Commission—in this form, voters elect commis-
sioners to head a city or county department,
like the fire, police, or public works
department.
State governments must approve and grant power to, or
charter, all town and city governments.
Political Parties
Although the U.S. Constitution does not mention the
existence of political parties, they have played an influ-
ential role throughout most of the country’s history. A
political party is an organization that presents its posi-
tions on public issues and promotes candidates that sup-
port its point of view.
– CIVICS AND GOVERNMENT–
145
STRUCTURE OF FEDERAL GOVERNMENT
Executive Branch President
■
A president is elected by the voters for four-year term.
Vice President
■
A president cannot serve more than two terms.
Agencies
■
Vice president becomes head of state if the president
Departments becomes disabled or dies in office.
■

Agencies carry out a president’s policies and provide special
services.
■
Department heads advise a president and carry out policies.
Legislative Branch U.S. Congress:
■
Number of representatives for each state is based on the
House of population of that state.
Representatives
■
Representatives serve two-year terms.
Senate
■
Each state has two senators.
■
Senators serve six-year terms.
Judicial Branch U.S. Supreme Court
■
U.S. Supreme Court is the highest court in the nation.
Circuit Courts
■
The president appoints the nine justices of the Supreme Court.
of Appeals
■
Term is for life.
Federal District Courts
Political parties serve several functions:
■
recruit candidates and run election campaigns
■

formulate positions on issues that affect the pub-
lic and propose solutions
■
educate the public on issues
■
mobilize their members to vote
■
create voting blocs in Congress
Since the mid-nineteenth century, two political parties
have dominated in American politics: the Republican
and Democratic parties. The two parties differ on social,
economic, and domestic policies. They also hold differ-
ent beliefs as to the role of government. The Republican
Party supports powerful state governments with less
involvement on the federal level, while the Democratic
Party supports a strong centralized government with less
power on the state level. Other current political organi-
zations include the Green, Libertarian, Reform, and
Socialist parties.
EXERCISE 7
Choose the best answer based on the information pro-
vided about political parties. The answer is on page 168.
1. Which of the following conclusions can you
make about political parties?
a. They should be outlawed because they are not
mentioned in the Constitution.
b. Prior to the nineteenth century, the Green,
Libertarian, Reform, and Socialist parties were
more influential than they are today.
c. Political parties have an influential role in the

political process today.
d. It’s hard to tell the Democratic and Republi-
can parties apart these days.
e. Third-party candidates can alter the outcome
of an election.
Voting and Elections
To vote in the United States, a person must be 18 years
old and a U.S. citizen. Presidential elections occur every
four years, and Congressional elections are held every
two years. Most national elections in the United States
use a plurality system, which means that a candidate need
only receive more votes than his or her opponent to win.
In contrast, some European nations have proportional
representation. In this system, if a political party earns
15% of the vote, it would be awarded 15% of the parlia-
mentary seats.
In the United States, primary elections are held before
general elections. In primaries, voters give their prefer-
ence for a political party’s candidate. General elections
then decide the ultimate winner.
Becoming an American Citizen
Immigrants come to the United States for many reasons:
Some seek economic opportunity, while others wish to
escape political persecution in their native countries.
Benefits of U.S. citizenship include enjoying the free-
doms and rights outlined by the Constitution. To
become a citizen, a person must apply, pass an exam, and
appear for a court hearing. This process, also called nat-
uralization, is conducted by the Immigration and Natu-
ralization Service (INS). The following are some of the

requirements for citizenship. Candidates must:
■
be at least 18 years old
■
reside legally in the United States for five years
■
be a person of good moral character
■
understand and be able to communicate in basic
English
■
demonstrate a basic knowledge of U.S. history,
government, and the Constitution
■
be willing to take an oath of allegiance to the
United States
– CIVICS AND GOVERNMENT–
146
E
CONOMICS is defined as the study of the ways that goods (and services) are bought, sold,
distributed, and used. The economics questions on the GED will require that you have a good grasp
of the relationship of supply and demand, recession and depression, how economic growth is
measured, and how the U.S. government is involved in the nation’s economy.

Types of Economic Systems
None of the three basic economic systems—capitalism, socialism, and communism—exists in pure form. Each has
some characteristics of the others. For example, in the U.S. economy, which is primarily capitalist, the govern-
ment does place some controls over private business in order to protect consumers.
CHAPTER
Economics

ON THE GED, questions about economics will include the areas
of supply and demand, inflation and deflation, and economic systems.
Many economics questions will ask you to interpret and analyze a chart
or graph, so practice in working with visual aids will be helpful in your
preparation.
16
147
TYPE CHARACTERISTICS EXAMPLES
Capitalism
■
Individuals and private organizations own and operate businesses.
■
United States
■
Free market determines production and distribution of goods and services.
■
Prices set by supply and demand.
Socialism
■
State owns and operates many businesses and services.
■
Sweden
■
Private ownership is allowed.
■
Citizens pay high taxes to fund state-run social services, including
healthcare, food, and housing.
Communism
■
State, or the community, owns all businesses.

■
People’s
■
State controls distribution of goods and services. Republic of China
■
State provides social services.
■
Cuba
■
Former Soviet
Union
– ECONOMICS–
148

The Marketplace
In the United States, prices are determined by the “mar-
ket,” or the principle of supply and demand. Supply is the
amount of goods and services available for purchase.
Demand is determined by how many people want to buy
those goods and services. Generally, when demand
increases, supply increases, and when demand decreases,
supply decreases. Industries charge prices that cover the
cost of production and make a profit for their company.
Industries try to get the highest possible price for their
goods. Consumers try to get the lowest possible price.
These different goals can affect the price of a product or
service.
When companies make the exact amount of a prod-
uct or service at a price that customers are willing to buy,
they have reached a point of equilibrium. If the price is

greater than this point, demand drops and there may a
surplus, which is when there are more goods produced
than customers are willing to buy. If the price falls below
the point of equilibrium, demand may increase and cre-
ate a shortage in supply.
For example, Company X is introducing a new cell
phone model, the XLZ. (See the graph on next page.)
The business wants to determine the equilibrium point,
so that it will not have a surplus or shortage of the prod-
uct. To cover its costs and make a profit, Company X can
supply ten phones for $1,100. As the price increases, the
company can offer more phones for sale. However, few
customers are willing to pay high prices for the phones.
As the price drops, demand increases.
E
XERCISE 8
Refer to the graph “Supply and Demand Curves for Cell
Phone XLZ” on page 149 to answer the following ques-
tions. The answers are on page 169.
1. At what price does the supply of cell phone
model XLZ equal that of demand?
a. $1,400
b. $1,300
c. $1,250
d. $1,500
e. $1,550
2. If the market price for cell phone model XLZ
increased to $1,600, what would be the likely
result?
a. Stores would quickly run out of product.

b. Demand would decrease.
c. The manufacturer would not be able to keep
up with demand.
d. The manufacturer would produce the cell
phone model at the same rate.
e. The manufacturer would go out of business.
– ECONOMICS–
149
Supply and Demand Curves for Cell Phone XLZ
1,900
1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
10 20 30 40 50 60 70 80 90 100
Price in dollars
Number of phones sold
Equilibrium
Supply
Demand
0

Business Cycles
Capitalist economies experience business cycles, periods
of growth followed by a period of low productivity and

income, called a recession. A depression occurs when
recession lasts for a long period and is severe. During the
Great Depression in the 1930s, the United States experi-
enced its worst depression. At that time, large numbers of
people suffered unemployment and homelessness.
Economic growth is the goal of capitalism. During a
boom period, companies are able to produce more goods
and services, and consumers are able to buy more goods
and services. Inflation occurs when the amount of money
in circulation increases and the amount of consumer
goods (supply) decreases. The dollar drops in value
and prices increase. Deflation happens when the money
supply decreases and the amount of consumer goods
increases. Prices are lower, but companies lose profit
and lay off employees, which results in higher rates of
unemployment.

Role of the Government
To avoid inflation and unemployment, the U.S. Federal
Reserve System (“the Fed”) takes measures to keep the
economy in balance by controlling the supply of money
in the country. One way it does this is by setting the
reserve ratio. Every bank that is a member of the Fed
must keep a reserve—a ratio of its deposits—that is not
used to make loans. To fight inflation, the Fed might set
a high reserve ratio, so that less money is available in the
economy. During recession or high unemployment, the
Fed might set a low reserve ratio, so there is more money
available within the economy.
The Federal Reserve Board can also affect the nation’s

economy by altering the discount rate, which is the inter-
est rate that the Fed charges banks to borrow money. To
make a profit, banks charge their customers a higher
interest rate than the rate they pay to the Fed. When the
Fed sets a high discount rate, banks charge more interest
on loans, which makes it more difficult for people and
businesses to borrow. When the Fed sets a low discount
rate, banks charge less, and more people and businesses
can afford loans.
Measuring Economic Growth
Economists use different data to study the health of the
economy. They look at stock market trading, the cost of
living, unemployment rates, and the gross domestic prod-
uct (GDP). The GDP measures the total value of goods
and services produced within the United States over the
course of a year. The gross national product (GNP) takes
into account both the GDP and foreign investments. If
the GNP decreases for two consecutive quarters during
a year, the economy is considered to be in recession.
Source: U.S. Department of Labor, Bureau of Labor Statistics.
The Consumer Price Index (CPI) measures changes in
the cost of living. To calculate the CPI, the U.S. Bureau of
Labor Statistics tracks changes in prices in common
goods and services—food, clothing, rent, fuel, and oth-
ers—each year. The graph shows the CPI in all U.S. cities
between 1990 and 2001. To make comparisons between
years, the graph uses the years 1982–1984 as a base
period (1982–1984 = 100). For instance, if the average
urban consumer spent $100 on living expenses in
1982–1984, he or she spent more than $150 on the same

expenses in 1995.
EXERCISE
9
Using the graph and passage about the consumer price
index, answer the following questions. The answers are
on page 169.
1. How much would an urban consumer expect to
pay in 2001 for an item that costs $50 in
1982–1984?
a. $88
b. $100
c. $176
d. $43
e. $131
2. What conclusion can you make based on the
graph?
a. The CPI tracks price changes for common
household expenses.
b. The cost of living has decreased in recent
years.
c. The rate of increase in the cost of living
slowed between 1999 and 2000.
d. If the cost of living continues to rise, people
will move out of the cities.
e. The cost of living for city residents steadily
increased between 1990 and 2001.
Consumer Price Index—All Urban Consumers 1990 –2004
180
170
160

150
140
130
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Index: 1982–1984 = 100
2002 2003 2004
190
– ECONOMICS–
150