UNIT VI
GOVERNMENT REVENUE AND SPENDING,
FISCAL POLICY & FEDERAL RESERVE AND
MONETARY POLICY
CHAPTERS 14, 15 & 16
PAGE 42 - GOVERNMENT
REVENUE AND SPENDING
Bottom Half:
Answer 1 – 3 on
page 418
Why Does this Matter?
• Taxes are a part of everyday life. The revenues raised from
these taxes fund programs and services that the government
provides such as highways, police, and parks.
Key Concepts:
• The Government provides public goods, aid for people in need.
• Non-tax sources include borrowing and lotteries
Principles of Taxation
• Benefits-received principle: people who benefit directly should pay
• Amount paid should be in proportion to benefits received
• Ability-to-pay principle: benefits received should not matter
• Amount taxed should depend on person’s ability to pay
Question Arises: Should everyone pay the same percentage of
income?
PAGE 43 - GOVERNMENT
REVENUE AND SPENDING
Complete Page
419 #’s 1 – 5 on
the bottom half.
Tax Bases:
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Individual income tax – on income from all sources
Corporate income tax – on corporation’s profits
Sales tax – on value of product; a percentage of sale price
Property tax – on value of assets, generally real estate; part of rent
Tax Structures:
• Proportional tax – flat tax – all taxpayers pay the same percentage of
income
• Progressive tax – higher income earners pay higher percentage of
income
• Most closely linked to ability-to-pay principle
• Regressive tax – lower income earners pay higher percentage of
income
• Examples: sales tax, property tax
PAGE 44 – FEDERAL TAXES
AND SPENDING
Other Taxes:
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Estate tax – on property transferred to others after owner’s death
Gift tax – on money or property given by one living person to another
Excise tax – on production or sale of specific product, such as gas
Customs duty – on goods imported from other countries
Mandatory Spending: required by current law
• Examples: Social Security, Medicare
Discretionary Spending: must be authorized each year
• Examples: highway construction, national park maintenance
Fiscal year – 12 month period for which expenditures are planned
• federal fiscal year is October 1 through September 30
Federal Budget – plan for spending federal revenue
PAGE 44 – STATE AND LOCAL
SPENDING
Local Spending
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Public schools—elementary and secondary
Safety—police, fire, emergency medical, disaster help; animal control
Welfare—health departments, hospitals
Utilities—water, transit systems, sewage, trash removal
Local roads, streets; recreational, cultural facilities
PAGE 45 - FISCAL POLICY
Fiscal – refers to government revenue, spending, and debt
Fiscal policy – government’s use of taxes, spending to affect the economy
Federal government’s tools to influence economy: taxation and spending
• Discretionary fiscal policy – actions government takes to stabilize the
economy
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Involve choices government makes about taxes or spending
Congress must enact legislation for policies to be implemented
• Automatic stabilizers – fiscal policy features that work automatically
PAGE 45 – FISCAL POLICY
Expansionary Fiscal Policy
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Increases aggregate demand so economy can grow
Increased spending on public projects done by hiring private firms
• Jobs created; workers spend on goods and services
Contractionary Fiscal Policy
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Spending cuts means less income for private firms working for government
Higher taxes reduce disposable income
Limitations of Fiscal Policy
1.
2.
3.
4.
5.
Policy Lags
Timing Issues
Rational Expectations Theory
Political Issues
Regional Issues
PAGE 46 - USING FISCAL POLICY
• Budget Surplus: occurs when government takes in more than it spends
• Budget Deficit: occurs when government spends more than it takes in
• Deficit Spending: spending more than revenues for specific budget year
• National Debt: the total amount of money the government owes
Causes of the Deficit
• Four main reasons for deficit spending:
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National emergencies usually require massive spending beyond normal
Building public goods and services is expensive, takes years
Public projects to stimulate, stabilize weak economy need large sums
Entitlement programs that people depend on are expensive
The Current Debt
• In 1981, debt was 33% of the GDP; 2006 was nearly 68%.
• In August 2006, national debt was about $8.4 trillion
• Today, it is over $17 trillion dollars (almost 18); about $56,260 per citizen
• It gains about $2 billion per day.
PAGE 47 - FEDERAL RESERVE AND
MONETARY POLICY
Creating the Fed
• Central Bank – nation’s monetary authority
• Monetary – means “relating to money”
• Federal Reserve System – Central bank of the U.S., called the Fed
• Independent organization within government; established 1913
• The Duties of a Central Bank
• Most countries have a central bank – either government controlled or
independent
• Assure stability: control how money is issued, circulated
• Lend money to private banks and government
• Fed uses regulation, oversight to protect bank customers, borrowers
• Banking services for private banks and government include
• Holding depots, transferring funds, making loans
• Helps finance wars, stabilize economy in national emergencies
• Regulates money supply, distributes currency – coins and paper money
PAGE 47 - FEDERAL RESERVE AND
MONETARY POLICY
Structure of the Fed
• Elements of the Fed
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Fed not a single national bank; has national and regional structure
Board of Governors – sets policy; supervises operations of the Fed
12 district banks carry out policy; serve as central bank for regions
Federal Open Market Committee – supervises government security sales
Thrift Institutions Advisory Council – needs of savings institutions
• Not regulated by Fed; must meet reserve requirements
• Services of the Fed
• Check Clearing
• Lending Money
• Regulating and Supervising Banks
PAGE 48 – FUNCTIONS OF THE FEDERAL
GOVERNMENT
• Serving the Federal Government
• The Fed also serves as the Federal Government’s banker
• Helps carry out taxation and spending activities
• Service 1: Paying Government Bills
• Tax revenues are deposited with the Fed
• Fed issues checks, tax refunds
• Service 2: Selling Government Securities
• Processes U.S. savings bonds
• Pays interest on bonds
• Service 3: Distributing Currency
• Fed banks distribute notes to depository institutions
PAGE 48 – FUNCTIONS OF THE FEDERAL
GOVERNMENT
Creating Money
• The Fed establishes the Required Reserve Ration (RRR) for banks
• The fraction of bank’s deposit that it must keep in the reserve
• Reserve may be stored as cash in bank’s vault or deposited with Fed
Factors Affecting Demand for Money
1. Cash on Hand (holiday season, tourist area during summer, disaster)
2. Interest Rates (high: excess cash in savings)
3. Cost of Goods and Services (if increase, people need more money)
4. Level of Income: (as income increases, have more to spend/ hold onto
Answer questions 1 – 6 on page 506