REVIEW
Vocabulary
Economics
 Study of how decisions are made when resources are
limited
 Scarcity
 Not enough resources to satisfy all of our desires
 Needs
 Things required for survival
 Wants
 Things we would like to have but don’t need for
survival
 Resources
 Things used in making goods & providing services

SCARCITY IS THE FUNDAMENTAL ECONOMIC PROBLEM
 Because of Scarcity we must answer 3 questions in
economics
 What to Produce?
 How to Produce?
 Whom to produce for?

Trade Offs & Opportunity Costs
Trade Off – Decision that must be made when choosing
between items
 Opportunity Cost – Value of the next best alternative that
was given up when an economic choice was made
 Can be time or money as well
 You always lose when faced with a trade off
 Production Possibilities: The combinations of goods and
services that can be produced from a fixed amount of
resources. (Guns vs. Butter or Computers vs. Food).

Assessment Activity:
All economic questions and problems arise
from scarcity. Economics assumes people
do not have the resources do satisfy all of
their wants. Therefore, we must make
choices about how to allocate those
resources. We make decisions about how
to spend our money and use our time.
This activity will focus on the central idea
of economics- every choice involves a cost.
 Let's say you have five dollars. What
would you like to spend it on? There are a
million things you would love to spend five
bucks on, but let's imagine there are only
three things out there you really want to
buy: gum, soda, and movie tickets. Look
at the price chart to the right and answer
the questions.

Good
Price
Gum
$ . 50
Soda
$1.oo
Movie Ticket
$5.00
Considerations for Businesses
 Productivity

Measure of the amount of output produced by a given
amount of inputs in a specific period of time
 Specialization
Takes place when people, businesses, regions &
countries concentrate on goods or services that they
can produce better than anyone else
 Examples – China and electronics

 Human

Capital
Sum of the skills, abilities & motivations of people
Gross Domestic Product (GDP)


Measure of an economy’s size & success
(monetary measure - $13.78 trillion in 2007)
Total value of all the final goods & services
produced in a country during a single year



Used cars not counted in GDP because second hand
sales are not counted
Used to measure standard of living (quality of
life based on the possession of necessities and
luxuries that make life easier) in a country
Measures quantity not quality
Gross Domestic Product (GDP)
cont.
Per Capita GDP – total GDP divided by the
country’s population (U.S. was $45,800
(2007 est.) )
 Compared yearly to check growth of
country

 Higher
GDP from previous year =
growing economy
 Lower GDP from previous year =
shrinking economy
NAFTA

North America Free
Trade Agreement
(NAFTA) – agreement
between Canada,
Mexico, and the USA
where tariffs were
almost completely
eliminated (“free
trade”)
Demand


Desire, willingness,
and ability must all be
present in the
consumer for demand
to exist
Demand Schedule: a
table that show the
various quantities of a
product or service
that someone is
willing to buy over a
range of possible
prices
Demand
Schedule
Demand Schedule
Shown as a graph:
Demand cont.
Each point represents how
much of a product a person will
buy at a certain price
 Demand Curve – formed by
connecting the points – always
slopes downward (Demand =
Down)
 Shows most people are willing
to buy less of a product at a
higher price and more at a low
price
 Law of Demand
 Quantity demanded and
price move in opposite
directions


P
D
P
D
Market Demand



Market Demand – total
demand of all consumers for a
product or service
 Example – Tobacco
We buy products for their
utility (pleasure, usefulness or
satisfaction products give us) –
it is different for everyone
 Example –
Diminishing Marginal
Utility
 Our additional satisfaction
tends to go down as we
consume more units
 Therefore we are willing to
pay less for it as we use
more of it
 Example – Pizza, Roller
Coaster Rides
Elasticity of Demand
Extent of change in price causes a change in
demand
 Elastic products – demand changes by large
amounts when the price is only slightly
changed
 Inelastic products – demand changes by
small amounts or does not change at all even
if price changes drastically
 Products with substitutes or luxury items are
more elastic
 Products with few or no substitutes are
inelastic

Supply




Can be 1 supplier or total
supply for a product
Producers offer different
quantities of a product
depending on the price
consumers are willing to
pay
Supply Schedule
 Quantities producers
are willing to supply
at various prices
The supply schedule
graphed shows the
supply curve.
Supply Schedule
Supply Schedule
Shown as a graph:
Supply cont.




Each point represents how much
of a product a company will
produce or supply at a certain
price
Supply Curve – formed by
connecting the points – always
slopes up (Up is in Supply)
Shows most companies are
willing to supply more of a
product at a higher price and
less at a lower price
Law of Supply
 As price rises, quantity
supplied rises
 As price falls, quantity
supplied falls
 Quantity demanded and price
move in same direction

P
S
P
S
Surplus & Shortages


A surplus will be at the top of the curves
A shortage will be at the bottom of the curves
At $6,
QD = 5
QS = 2
At $12,
QD = 2
QS = 4
The Surplus in this graph is
__________________
The Shortage in this graph
is ______________
• A surplus signals the price is too high
• A shortage signals the price is too low
Price Ceiling

Government or
group imposed limit
on how high a price
can get for a
product


Examples: Rent
prices in NYC after
WWII, Gas Prices
Must be below
Equilibrium Price to
be effective


Ineffective
Effective
Why?
Causes Shortages
in the Market
What is the Shortage in the graph?
Price Floor

Government or Group imposed limit on how low the
price of an item can get


Must be above Equilibrium Price to work


Example: Minimum Wage, Agriculture
Why?
Causes Surplus in the Market
Class Question
150
375
What is the Surplus from the Price Floor?
The Business Cycle


The Business Cycle (AKA The
Economic Rollercoaster)
 The ups & downs of the
economy
 Alternating periods of growth &
decline
4 Phases
1. Expansion (Also known as
Prosperity or Recovery)
 Economy is improving
 Businesses produce more
needing more employees
 Higher employment means
higher wages
 Higher wages mean higher
consumption
 Higher consumption means
more production
The Business Cycle
2. Boom
 Economic activity is at its peak
 Peak – the highest point of the boom
 Businesses are working at full capacity
 Law of Diminishing Returns – as a
business adds more resources to
production profits will rise until a
point where more resources begin
reducing profits
Business Cycle
Peak
Trough
Boom
Expansion
Decline/
Recession
Recovery/
Prosperity
The Business Cycle
3. Decline



The economy is slowing down
Production is cut down
Workers are laid off
4. Recession (Contraction)

Occurs when Real GDP goes down over 6 months
Real GDP – shows economy’s production after the distortions
of price increases have been removed
 Eliminates impression that output has gone up when only
prices have gone up






Lowest period of production
Unemployment is high
People do not buy as much
Trough: lowest point of a recession
Depression: a severe recession
Business Cycle
Measuring the Economy

GDP Categories




Consumer goods – bought by consumers for final use
Business (Capital) goods – bought to be used by a
business to produce other goods
Government goods – anything bought by the federal,
state and local governments
Net Exports



The difference in what the nation buys & sells with
other countries
Export – anything sold to another country
Import – anything bought from other countries
Trade Deficit
Imports vs. Exports
Types of Business
CH. 22, SECTION 1
4 Elements of Business
Expenses
1.
•
What you need to start & continue a
business
Advertising
2.
•
Introduction and reminder of your
business
Receipts & Record Keeping
3.
•
Needs to be accurate and dependable
– for profits & losses
Risk (profit vs. loss)
4.
•
Risk is a consequence to the
Considerations When Starting a
Business
 Establishment
of
inventory
 Use of
computers/Technol
ogy
 Turbo Tax
 Time – the
opportunity cost.
You could be
working for
someone else.
3 Types of Businesses
Sole Proprietorship
1.
•
•
•
•
•
Owned by 1 person
Easy & relatively
inexpensive to start
would be a need
Small businesses
typically
Most common form
of business
Owner receives all
Sole Proprietorship
Advantages
 Receive all profits
 Quick decisions
because no
consultation
 Relatively low taxes
Disadvantages
 Unlimited liability
 Handle all decisions
 Time consuming
 Rely on own funds
 Business depends on
one person
3 Types of Businesses cont.
2. Partnership
•
•
•
Owned by 2 or more individuals
Articles of Partnership – Partners sign an
agreement on what each is responsible
for.
Limited Partnership
o
o
o
o
•
Partners are not equal
General Partner – majority of control
Limited Partner – own a small part – do not voice
opinions & are responsible only for what they put
in
LLPs (Limited Liability Partnerships) [mix of
corporations and partnerships): Very popular
with lawyers, accountants, and architects.
Joint Venture
o
temporary partnership to do a job
Partnership
Advantages
 Losses are shared
 More efficient than
proprietorships
 Pay taxes on share of
profit
 Easier to borrow
money
Disadvantages
 Profits are shared
 Unlimited liability,
most of the time
 Must reach
agreements
 Committed partners
3 Types of Businesses cont.
3. Corporation
 Owned by many
 Started by a founder
 Owned by Stockholders
 Run by a Board of Directors
 State government issues a charter to run the business
 Complicated structure
 Business has the same rights as an individual
 Are Double Taxed
 Founder’s responsibilities
Register with the state government for a charter
Sell Stock
 Select the initial Board of Directors



Board of Director’s responsibility



Elected by Stockholders
Supervise & control the corporation
Make all major decisions
Corporations
Advantages
 Owners do not have
to devote time to
make money.
 Stockholders have
limited liability; they
only lose what they
put in.
 Individuals trained in
specific areas make
decisions.
Disadvantages
 Decisions are slow.
Interest of the board
may differ from the
stockholders.
 Double taxation.
Govt. taxes corporate
profit than individual
shares.
 Stockholders have
little or no say in how
Stocks and Bonds
 Stock:
Individual
ownership in a
corporation.
Shareholder
receives voting
rights and
dividends.
 Bond: Promise by
a corporation to pay
a stated amount of
interest over a
period of time.
Other Types of Businesses
Franchise – sell the name & structure of a
business
 Help train employees & set up the business
 Franchisee – pays a start up fee & annual fee
 Non – Profit – business does not run to make
money
 Cooperative – individual businesses that work
together to benefit all members
 Producer – Ex: Farmer’s Market
 Consumer – Ex: PCC Natural Markets, REI
 Service – Ex: Credit Unions, Utility companies

 Process
where union leaders &
employers discuss employment terms
 Compromise is the issue
 3 steps
Negotiation – Labor & management meet to
discuss contract issues
 Mediation – A neutral 3rd party hears both sides



Federal Mediation & Conciliation Service provides a
mediator
Arbitration – 3rd party makes a final decision of
compromise
Right to Work States in Blue

Right to Work States


Prevents unions from forcing
workers to join
Movement of Human Capital



Rust belt – the North
Sun belt – the South
Factories & businesses moved
from the rustbelt to the sunbelt




Weather was better
Cheaper labor
No existing unions
White collar vs. Blue collar jobs
White Collar = upper
management
 Lot of news lately on white
collar crime in big business.
Example: Enron, Merrill
Lynch
 Blue Collar = working class,
usually doing manual labor

Blue Collar Workers
Roles of the
Government &
Monopolies
Ch. 23, Section 1
Roles of the Government
1. Provide Goods & Services

Private goods




Exclusion Principle – a person is excluded from an
item’s consumption unless he/she pays for it
Mostly businesses provide private goods
Examples
Public goods



Non-Exclusion Principle – no one is excluded from a
good or service whether or not they pay
The government provides public goods
Examples
Roles of the Government
2. Handle Externalities
 Externality – unintended side effect
of an action


Public goods provide positive externalities
because everyone benefits from them
Promotes positive externalities


Examples
Prevents negative externalities

Examples
Positive or Negative?

Bee Keepers next to a farm field


Ryan burning tires for the scrap metal


Positive. Why?
Taylor finds the cure for AIDS.


Negative. Why?
Mrs. Smith planting a flower garden.


Positive. Why?
Storing nuclear waste from the power plants.


Negative. Why?
Danny buys a brand new video game.


Negative. Why?
Over-harvesting of the fish population.


Negative. Why?
Company that pollutes the local stream


Positive. Why?
Positive. Why?
Mr. Cleland buys a home.

Positive. Why?
Roles of the Government
3. Regulate Market Activities
 By regulations, the government reduces negative
externalities
 FTC – Federal Trade Commission – regulates truth
in advertising



FDA – Food & Drug Administration – enforces
purity, effectiveness and labeling of food, drugs &
cosmetics
CPSC – Consumer Product Safety Commission –
recalls unsafe products



Example
Recall – company pulls product or changes it
Example – Peanut recall, Chinese lead based toys
Pg. 632 for other regulatory agencies
Roles of the Government
4. Ensures Competition
 Competition is fundamental to a market economy
 Exists if different businesses produce similar products
 Monopoly – One group controls the market
 Anti-trust laws – intended to control monopoly power &
promote competition
 Sherman Anti-trust Act – 1890
 Theodore Roosevelt – the “Trust-Buster” – Northern
Securities
 AT&T – Ma-Bell
 Mergers – combination of two or more companies to form a
single business




Government will stop if competition will be decreased
Horizontal Merger – Companies in the same business
Vertical Merger – Company joins with one it buys from
Conglomerate – Buying of un-related businesses

Example: GE (power plants, light bulbs, etc)
Perfect Competition
Large markets – requires a large
amount of buyers & sellers
 Similar products
 Easy Entry & Exit
 Information obtainable for Buyers
 No control over price – Market price
is the equilibrium price (decided by
supply & demand)

Imperfect Competition

Imperfect Competition
 One

group can affect price
Monopoly – one group controls all of
the market
 Single
seller
 No substitutes
 No easy entry
 Controls the market price – suppliers
can raise prices without losing business
Types of Monopolies

Natural: Control of resources – the
government allows these but regulates
them


Geographic: control of a location



Example: Dick’s only Sports store in area
Technological: Patent owned on
technology
Government: created by the
government. – Illegal to enter


Example: Water Company
Example: Postal Service
Cartel: International form of monopoly

Example: OPEC
Barriers to Entry
Government regulations:
Technological or Government or
regulations are too expensive
 Cost of getting started: Large
amounts of capital are needed
 Ownership of Raw Materials:
Companies control materials & do not
sell to competitors

Oligopoly
Domination of a few businesses in
competition
 Barriers to entry
 Identical or slightly different
products
 Some control of price

Oligopoly Examples

Movie Studios
 Example:

Television
 Disney/ABC,
CBS Corp., NBC Universal, Time
Warner, and News Corporation

Food Processing
 Kraft
Foods, PepsiCo, and Nestle
Fiscal and
Monetary Policy
Ch. 24
The Government and the
Economy
 Regulating the economy
We want slow growth
 If the economy is not doing good we can fall
into a recession (right now) and people can lose
their jobs
 If the economy is growing too fast we can have
rapid inflation; where prices rise faster than
wages
 Both are bad – Two ways to make sure our
economy is growing slowly


Fiscal and Monetary Policy
The Federal Reserve (FED)

Independent Agency: part of the
government but unattached to Congress
& the President


Allows them to make economic decisions free
from political pressure
Roles of the FED
Regulates foreign banks that do business in
the U.S.
2. Our Government’s bank
1.



3.
Holds government’s money
Buys and Sells Bonds for Government
Issues our currency
Conducts Monetary policy
The Federal Reserve (FED) cont.

Board of Governors (7 member board)
Chairman – Ben Bernake
 Alan Greenspan was Chairman from 1987 to
2006

Advisory Council (12 members – 1 from
each district)
 Federal Open Market Committee (FOMC) –
major policy making group
 12 Federal Reserve Banks & Branch banks

Fractional Reserve Banking

The tools the FED has to create money
Discount rate – prime rate which banks
borrow money from the FED
 Reserve Requirements – Percentage of
deposits that banks must hold
 Open Market Operations – buying and selling
of government bonds
 Federal Funds Rate – interest rate that banks
lend to other banks usually overnight


The FED Today video
Monetary Policy
Quicker response than fiscal policy
 Regulates the amount of money in
circulation
 Tight Money Policy







Goal is to stall growth to stop inflation
Taking money out of circulation
Can lead to a recession
Raising interest rates
Raising the reserve requirements
Selling bonds
Monetary Policy cont.

Loose Money Policy






Goal is to start growth of the economy to
combat a recession
Increasing the money supply
Can lead to inflation
Lowering of interest rates
Lowing reserve requirements
Buying bonds
Fiscal Policy


Government (politicians) use taxing and spending to
regulate the economy
Tools:



Tight Fiscal Policy





Tax: can be raised or lowered
Spending: can be increased or decreased. Ex. Cutting back
on public works projects
Combat inflation
Raise taxes
Cut spending
Take money out of economy – slow economy
Loose Fiscal Policy




Combat a decline
Cut taxes
Increase spending
Put money into Economy – grow economy
Money


Replaced the barter
system in traditional
economies
Functions

Medium of exchange


Store of value


Used to trade items
Reliability to store,
save, and retrieve
Measure of value



Can be divisible
Each one must be equal
to the other
Not easy to counterfeit
Banking






Brings savers (sellers) &
borrowers (buyers)
together in the market
Savers = deposits
Borrowers = loans
Banks are a business and
have profit motive
Make money off of fees
and interest on loans
Reserve Requirements –
banks want more
deposits so they can loan
more money
Types of Deposit Accounts
1.
Checking Account





Allows customers to write checks, use debit
cards or withdraw money from an ATM
(Automated Teller Machine)
Money transactions are quick and efficient
Money does not stay in the account for long
Depositor usually receives no interest
Checking/Debit Cards
 Transfer
of funds electronically
 Tied directly to checking accounts
Types of Deposit Accounts cont.
2. Savings Account
Banks pay interest to customers based on
how much money is deposited
 Money grows larger the longer it is there
 Money remains untouched for longer periods
of time

Types of Deposit Accounts cont.
3. Certificate of Deposit (CDs)
 Customers
loan a certain amount to the bank
for a certain amount of time
 Ex.
I bought a $1,000 CD for 1 year at 4%
 Higher
rates of interest than savings
 Customers can’t withdraw their money
without a penalty
Types of Banks
1.
2.
3.
Commercial Banks – full service to individuals
& businesses (Most common)
Savings & Loan Associations – traditionally
loaned money to people buying homes &
issued only savings accounts
Credit Unions – non-profit – sponsored by
large businesses, labor unions or government
institutions – offer full services at usually lower
prices
FDIC
Federal Deposit Insurance Corporation
 Insures deposited money in the bank up
to $100,000 – Right now $250,000
 Most are FDIC insured

Loans









Agreement for borrowing money with repayment plus
interest
Used to make expensive purchases
Banks make money on the interest paid for a loan
In order to make loans, banks have to have money
To have the money, banks must attract deposit
customers
Can increase the supply of money
Principle – amount borrowed
Interest – cost of borrowing
Interest Rate – rate of cost to borrow
Types of Loans
1.
2.
Fixed – interest is set & can’t be changed
Variable – Changes when interest rates
change
Charge Accounts
Buy goods & services at individual stores
& pay for them later
 Credit limit: maximum amount a person
can buy with the promise of payment

Types of Charge Accounts
Installment Account
1.
Repaid with equal payments over a certain period of time
Part of the payment goes towards interest & part towards the
principle



Car loan or mortgage
Regular Account
2.
Billing cycles where a bill is sent at the end
No interest is charged if entire bill is paid
Account can’t be used again until the balance is paid
Interest is charged on the balance not paid





Furniture Stores usually do this. Pay by 2010, certain amount each
month, but with no interest.
Revolving Account
3.
Billing cycles where a bill is sent at the end
Interest charged on portion not paid
Account can still be used until credit limit is reached




Example: Credit Cards
Credit Cards
Make purchases without having the money
 Charge high interest rates – usually @
18%
 Lower interest rates if the customer is
reliable
 Finance Charges – Cost of credit (interest)
expressed in dollars
 APR – Cost of credit (interest) expressed
as a percentage

Applying for Credit
Fill out application
 Credit Bureau does a credit check
 Creditor may ask for references
 Credit checks show your income, debt and
ability to pay debts in the past

Credit Rating
Rating of risk: Excellent, Good, Average or Poor
 Ratings have a number associated with them
 3 Credit Bureaus: Experian, Transunion &
Equifax
 Gives lenders an idea of reliability when issuing
loans


Higher Credit Score = less interest you are charged
on a loan = saving money
Unsecured loans – loan based on reputation
 Secured loans – have collateral to back up the
loan

Government Regulations
Equal Credit Opportunity Act: a
person can’t be denied credit because of
race, religion, national origin, gender,
marital status or age
 Usury Laws: Restrict the amount of
interest companies, not banks, can charge

 In
North Carolina, it is 8%. Lend neighbor
$100 loan can only receive $8 from interest
Bankruptcy
Debts are so large they can’t be paid back
 Most of what a debtor owns is sold or
given to creditors
 Takes 10 years to reestablish credit

 States
can become bankrupt too
Consumer Responsibilities

Smart Buying Strategies



Info on products
Watch out for advertising
Comparison shopping – find out prices on product
from different stores/internet


When product fails





Brand Name vs. Generic
Report it
Check the warranty
Keep a copy of records
Be calm
Make Fair complaints

Ex.
Taxation and Budget
Ch. 25
Major United States Taxes

Personal income: Tax on an individual’s yearly income.










Granted by the 16th amendment
April 15th is income tax day.
Corporate income: Tax on a corporation’s profit.
Social Insurance: Social security tax. (FICA).
Excise: Special tax on alcohol, tobacco, and gasoline.
Estate: Tax on the assets of the deceased.
Inheritance: Tax paid on anything person inherits.
Gift: Tax paid on the value of an expensive gift received.
Sales: Tax paid on all purchases made by people who work.
Property: Tax on the value of property. Can include
buildings, stocks, bonds, and home furnishings.
Example of a Paycheck
Example of a Paycheck
What shows the economy is
growing?
1.
2.
3.
4.
GDP decreases from the previous year
CPI is very low
Mr. Cleland doesn’t give homework for a
week
GDP increases from the previous year
Taxation
Revenue: Money the government receives.
 Expenditures: Money the government
spends.
 60 to 80 percent of state and local government
revenue comes from taxation.
 Intergovernmental Revenue: Money
received from other governments.



Example: States receive a big chunk of money
from the Federal Government. Local governments
then can get some of that money from the state.
Nearly 100 percent of federal government
revenue comes from taxes.
NC
Governme
nt Revenue
NC
2005
What happens when the real
GDP goes up?
1.
2.
3.
4.
The economy expands
Unemployment rises
Prices are inflated
The economy suffers a recession
Taxation Problems
The government sometimes abuses its power to
tax which leads to revolts.
 Stamp Act (1765): British tax on virtually all
goods.
 Tea Act (1773): British tax on tea. Led to the
Boston Tea Party.
 British taxes lead to the American Revolution
where the United States became a free country
after defeating England.

Which of the following is
known as a “banker’s bank”?
1.
2.
3.
4.
Department of Welfare
Federal Reserve System
Internal Reserve Service
Federal Open Market Committee
United States Taxation Problems
Shay’s Rebellion (1786): Heavy state taxes
in Massachusetts put many farmers in debt.
Daniel Shay led a group of 1,200 farmers in a
revolt. The revolt was put down.
 Tariff of 1828: High tariff on imports. Hurt
the southern states because of lack of
industries. Secession was openly discussed in
South Carolina.
 Tariff: Tax on imports.
 Secession: Separate from the nation.

The Glass-Steagall Banking Act
established which federal
institution?
1.
2.
3.
4.
The Federal Deposit Insurance
Corporation
The Bank of the District of Columbia
The Federal Reserve
The 2nd Bank of the US
Taxation Powers
The first government of the United States
was the Articles of Confederation.
 The national government could not tax
under the Articles.
 Under the Constitution, the government is
given a limited power to tax to keep it
from abusing its power.

If a nation has a comparative
advantage w/regard to the
production of a certain good,
what is most likely to do?
1.
2.
3.
4.
Import more of that product
Specialize in making that product
Ban the making of that product
Suffer from a scarcity of that product
Limits on Taxation
The Constitution gives the government the
power to tax.
 All appropriations bills (tax bills) are introduced
in the House of Representatives.


Appropriations bills are laws that allow spending for
a particular activity
All national taxes are the same throughout the
country.
 The 14th amendment says all groups must be
taxed equally.

Which of the following was not
an effect of the trade deficit in
the US in the late 1990s?
1.
2.
3.
4.
The import industries had higher
unemployment
The supply of US dollars increased
The US dollar lost some of its value
The export industries had higher
unemployment
Tax Classifications
Progressive tax: Based on income. Higher
taxes on those with higher incomes. Those who
make less than a certain minimum pay no taxes.
 Regressive tax: People pay the same amount
with no consideration of income.



Effects people with lower incomes because it’s a
larger percentage of their total income.
Proportional tax: Takes the same percentage
of all incomes.
Income Tax
Tax on income
 16th amendment (1913): Gave the
government the power to collect income
tax.
 Personal income and corporate income are
the two types.

Tax Burden on Income Levels
2008 Income Tax Brackets
Which of the following is
essential to the success of a
free enterprise system?
1.
2.
3.
4.
Minimal
Minimal
Minimal
Minimal
government interference
legal ground rules
private ownership
competition between businesses
Tax Return





The deadline is April 15th.
All taxpayers fill out a tax return form and send
it to the Internal Revenue Service (IRS).
An exemption is a portion of income that is not
taxed.
Deductions are for medical expenses and
charitable contributions. They are not taxed.
Everything else is taxable income.
The forklifts that are used to load
semis would be classified under
which of the following 4 “factors
of production”?
1.
2.
3.
4.
Natural resources
Labor
Capital
entrepreneurs
Paying Income Tax
Employers withhold funds from checks to
pay the state and national government.
 Because of this, taxpayers do not pay as
much at the end of the year.
 Some taxpayers receive a refund.

Property Tax
The property is examined to asses the
value.
 Local governments set the tax rate.
 Property taxes have increased steadily
over the years leading to taxpayer revolts.

Sales Tax
Tax paid at the time of purchase.
 The revenue is sent to state and local
governments.
 Many state governments exclude
necessary items from the sales tax.

 North
Carolina is the 1st Friday in August
Which of the following statements
about e-commerce is not
accurate?
1.
2.
3.
4.
It boosts the revenue of each state in
the US.
It can take away business from
traditional retail stores.
It allows customers to avoid paying sales
tax.
It offers customers greater shopping
convenience.
Tariffs
Designed to raise revenue and protect American
businesses.
 Products are made cheaper in other countries
and brought to America.
 When America charges a tariff, the country
charges a tariff on American goods.
 Tariffs have caused many problems in U.S.
history.

Non-Tax Revenue





The government will sell and rent land.
The government will charge tolls for the use of
roads and canals.
The government will charge fees for driving,
hunting, fishing, and getting married.
Charge fines (traffic).
Government run lotteries provide revenue, but
they are controversial.
Budget







Budget: Plan for managing and spending
money.
Governments create budgets to help them make
decisions because of limited resources.
Two parts: Revenue and Expenditures. (look on
page 679)
Runs on a fiscal year: October 1-September 30.
The Office of Management and Budget (OMB)
asks each federal department to estimate the
amount of money they will need.
The OMB estimates the government’s revenue.
The completed budget is about 1000 pages
long.
Federal
Revenue
2007
2006 Government Expenditures
Revenue vs. Expenditures
Which form of tax revenue
accounts for the highest
percentage of federal income?
1.
2.
3.
4.
Estate taxes
Excise tax
Income tax
Payroll tax
Passing the Budget

The President sends the budget to Congress.

Appropriations bills must be passed by the House of
Representatives
Congress frequently changes the budget.
 The budget is always filled with compromises.
 State budgets follow the same process as the
national budget. (look on page 683)
 Budgets change from year to year because of
different political philosophies.

Budget Deficits





Deficits occur when expenditures exceed
revenue.
The U.S. budget had a deficit from 1968-1996.
Look on page 690
Governments are expected to do more without
raising taxes.
This forces them to borrow money.

President Obama has proposed cutting deficit in
half before his first term is over.
Expenditures on Elementary and
Secondary Education
What conclusion can be reached in
determining why the Federal
Reserve Board lowered interest
rates?
1.
2.
3.
4.
The economy is booming and spending needs
to decrease
The FED is encouraging the national
government to borrow money from private
banks
The FED is attempting to loosen the money
supply to encourage more borrowing by
individuals
Businesses are experiencing record losses in
sales
Borrowing Money
The government borrows money to make
up for a deficit.
 Most borrowing comes from the sale of
government bonds.
 The government pays off the bonds as
they come due.

 China
owns a great amount of the US bonds.
Estimated $900 billion.
Percentage of Foreign Holder of US
Bonds
National Debt
The total amount the government owes on
the money it has borrowed.
 Goes up with each deficit and accumulated
interest.
 Interest: Fee paid for the use of money.

 1996:
Interest was $345 billion. They borrow
to pay off the interest.
National Debt in the Future
Why would a person put money
into a Certificate of Deposit (CD)
instead of a regular savings
account?
1.
2.
3.
4.
Money is more easily accessible with
CD’s
Savings accounts do not accumulate
interest
A person receives greater tax benefits
with CD’s
CD’s accumulate higher interest
compared to savings accounts
Balancing the Budget
Balanced Budget: Expenditures do not
exceed revenue.
 In 1995, Republicans introduced the
Balanced Budget Amendment. It called for
a balanced budget by 2002. It did not
pass.
 Many state constitutions require balanced
budgets with no borrowing.

 Rely
on the emergency funds to pay off debts
when state economy is struggling
Automatic Stabilizers

Programs to automatically stimulate
economy as soon as they are needed
 Unemployment
 Income
tax
insurance