Unit 6 Chapters 14 & 16

Government Spending

Taxes can affect resource allocation – increase price of product=makes people buy less=company cutting back on production Taxes can be used to encourage or discourage certain types of activities; liquor/tobacco (sin taxes) Distribution of income affected by taxes Taxes change incentives to save, invest, and work The incidence of a tax—the person or company who actually pays it—is not necessarily the entity that is taxed (EX: if a utility is taxed, it may pass the burden of the tax on to its customers in the form of higher rates) Main Ideas

Shifting Taxes

WRITE ONE PARAGRAPH, TO TURN IN TO BASKET, ANSWERING THE QUESTION ABOVE.

Federal Government Budget The president’s Office of Management and Budget prepares federal budget sends it to House of Representatives. Divided into 13 categories and sent to subcommittees that prepare and vote on appropriations bills for them. Approved bills go to full Appropriations Committee then to House for vote. After House approved budget, is sent to the Senate, which may approve the House’s bill or draft another version The approved bill is sent to the president for signature or veto. If signed, the budget becomes official for the next fiscal year, starting on October 1. Federal Government Budget

Federal Government Revenue Sources

Federal Budget 2014

Federal Government Spending

Assignment Work independently Turn in to basket before you leave or it will be late work Page 410, questions 1-7 Page 422, questions 1-8 Assignment

1981, Reagan believed taxes were stumbling block, signed Economic-Recovery Tax Act-large tax reductions for individuals & businesses 1986, tax code favored rich (3000+ millionaires paid no income taxes in 1983), Congress passed tax reform -Alternative Minimum Tax people had to minimum of 20% tax regardless of loopholes 1993, driven by government deficit, two new tax brackets were added, and closure of more loopholes 2001, gov’t collected more taxes than it spent, Pres Bush backed $1.3 billion “temporary” 10 year tax cut 2003, those earning top 10% increased taxes slightly, child tax credit increased from $600-$1000, put gov’t back in deficit same as 1993 2013, economy grew slowly after Recession, two new tax brackets added Tax Reforms

Impact of National Debt We owe most of the debt to ourselves Affects: Purchasing Power- when public debt increases people have less money to spend Reduction of Economic Incentives- if gov’t appears to spend money carelessly tax payers won’t want their money going to those departments Crowding-Out- higher than normal interest rates caused by heavy borrowing Impact of National Debt

States create budgets differently, most are loosely modeled after federal budget Intergovernmental expenditures-transfer of money from one gov’t department to another (largest spending) Public Welfare- cash assistance, medical care, welfare institutions (second largest spending) State Spending

Mayor, city council, and county judge approve budgets Revenue is collected from property taxes, city income taxes, and other local fees Largest spending on elementary & secondary education Second on utilities Third on hospitals Fourth on Police & fire protection And other-street/hwy repair, public welfare, parks, corrections Local Gov’t Spending

Question IN YOUR NOTES: Should the rich pay higher taxes? Why or why not? Use facts to support your argument for or against. Why pay your taxes video Question

Responsibilities of the Fed

Fed led by 7 member board of governors, appt Fed led by 7 member board of governors, appt. by president & approved by Senate to serve 14 year term Federal Reserve District Banks-intended as 12 independent banks but work together more now Federal Open Market Committee-primary monetary policy-making committee, has power to raise/lower interest Advisory Committees-one rep from each of 12 banks meet 4 x per year Structure of Fed

Fractional reserve system-banks are required to keep portion of total deposits in legal reserves (coins, currency, etc) Size of reserve is determined by reserve requirement, percent of every deposit; bank can lend out the rest Monetary Policy

Fractional Reserve Syst.

Conducting Monetary Policy Changes in money supply that affect availability and cost of credit, affects interest rates & influences economic activity Based on supply & demand Changes interest rates by changing size of money supply Expanding money supply = lower interest rates Restricting money supply=higher interest rates Fed uses three tools to conduct monetary policy Reserve Requirement (Congress sets limits) Open Market Operations (buying & selling of gov’t securities) Discount Rate (interest charged on loans to other financial inst) Conducting Monetary Policy Banking Video

Federal Reserve

What effects do protection policies for banks have on the economy as a whole? A: American taxpayers absorb the financial burden

Popularity of supply-side policies Economy would grow faster if gov’t lowered taxes & reduced regulations Not designed to deal with short-term fluctuations of business cycle Promoted growth and economic efficiency Had little to offer when Great Recession hit Popularity of supply-side policies

Changing Nature of Economics Great Recession of 2008 changed everything Discretionary fiscal policies (action by Congress or president) Popularity of fiscal policy declined after Reagan took office Gridlock-when political parties in Congress oppose each other’s budget views Ideology-belief that American economy needs structural change Changing Nature of Economics

Economics & Politics Today Great Recession showed U.S. needed combination of policies to work “economic politics”-politicians concerned with the economic consequences of their decisions Economists differ bc they don’t agree on which issues are most important Council of Economic Advisors- 3 member group that reports on economic developments and propose strategies Economics & Politics Today

Create and fill in the chart-IN YOUR NOTES. Use the book to answer.