UNIT VI GOVERNMENT REVENUE AND SPENDING, FISCAL POLICY & FEDERAL RESERVE AND MONETARY POLICY CHAPTERS 14, 15 & 16

PAGE 42 - GOVERNMENT REVENUE AND SPENDING 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? Bottom Half: Answer 1 – 3 on page 418

PAGE 43 - GOVERNMENT REVENUE AND SPENDING Tax Bases: 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 Complete Page 419 #’s 1 – 5 on the bottom half.

PAGE 44 – FEDERAL TAXES AND SPENDING Other Taxes: 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 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 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 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 Spending cuts means less income for private firms working for government Higher taxes reduce disposable income Limitations of Fiscal Policy 1.Policy Lags 2.Timing Issues 3.Rational Expectations Theory 4.Political Issues 5.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: 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 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