1. SOURCES OF GOVERNMENT REVENUE
All levels of government raise revenue through taxation.
Individual income taxes
payroll taxes
corporate income taxes
estate taxes
gift taxes
import taxes
This is a review from Chapter 10

2. SOURCES OF GOVERNMENT REVENUE
Selling Government Securities
A Treasury bill (T- bill) is a security issued by the U.S. Treasury that matures in 4, 13, 26, or 52 weeks.
A Treasury note (T- note) is a U.S. Treasury security that pays interest in the form of coupon payments and matures in 2, 3, 5, or 10 years.
A Treasury bond (T- bond) is a U.S. Treasury security that pays interest in the form of coupon payments and matures in 30 years.
Ask the students if they have US Savings bonds and then explain to them that they are US debt holders.

3. THE FEDERAL BUDGET
The federal budget is a plan for how the federal government will spend money over the coming fiscal year. The fiscal year for the federal government is the period over which the federal budget applies. It begins on October 1 and ends on September 30.
Go through the steps in the budget process and stress with students that the president presents a budget.. Congress then debates and amends the budget. If no agreement is reached, a continuing resolution must be passed and signed by the president.
Look online for the federal budget. Whitehouse.gov has great resources for the budget.

4. THE FEDERAL BUDGET SPENDING Federal Government Spending, 2012
Challenge students to explain the categories shown. Recall the goal of economic security, then discuss the items that give the elderly and others that protection.
Lead an investigation as to the changes in social security and Medicare as a percentage of the budget. This will help explain discretionary spending issues later.

5. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
Mandatory spending is spending that is required by existing law.
Entitlement programs are programs that people are entitled to by law if they meet certain qualifications.
Show the eligibility rules for SS and Medicare. This will give an idea of what an “entitlement” is.
These government-provided benefits that are not in exchange for goods or services are known as transfer payments.
To receive payments under the Disability Insurance program of the Old Age, Survivors, and Disability Insurance (OASDI) system, a worker must be unable to work due to a disability.
Age and past contributions are the only eligibility requirement for Social Security recipients, the other part of OASDI.
Medicaid and the Supplemental Nutrition Assistance Program, commonly referred to as food stamps are means-tested, meaning that eligibility for benefits depends on the prospective recipients’ income.

6. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
Transfer payments are payments for which the government receives no goods or services in return.
Those circled in red would be the transfer payments.

7. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
Age eligible?
Social Security, Medicare
Means-tested?
Medicaid,
Supplemental Nutrition Assistance
Program
Require contribution?
Social Security, Disability Insurance,
Medicare, Unemployment Insurance
States set eligibility?
Temporary Assistance for Needy
Families, Unemployment Insurance
Age eligible? Social Security, Medicare
Means-tested? Medicaid, Supplemental Nutrition Assistance Program
Require contribution? Social Security, Disability Insurance, Medicare, Unemployment Insurance
States set eligibility? Temporary Assistance for Needy Families, Unemployment Insurance

8. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
Discretionary spending is government spending that is not required by law; rather, it is authorized annually by Congress and the president.
Net Interest cannot be called discretionary. We are obligated to pay the interest on the national debt. As the debt grows, the interest mount increases, Without new sources of income, discretionary spending must be cut.
Discuss the shrinking discretionary portion of the federal budget.

9. DEBT, DEFICITS, AND SURPLUSES
A budget deficit or budget surplus is the difference between the amount of government payments and the amount of government revenues in a particular year.
Help students to understand the causes of the huge deficits created in 2000 and beyond.

10. DEBT, DEFICITS, AND SURPLUSES
The national debt is the amount of money that the federal government has borrowed over time to fund annual budget deficits and has not yet repaid.
Make the connection that the large sustained deficits have doubled the debt in the last five years.

11. DEBT, DEFICITS, AND SURPLUSES
The national debt consists of two categories:
The public debt is the money owed to investors (individuals, banks, pension funds, fund managers, insurance companies, both domestic and foreign) by the federal government.
The intragovernmental debt is the money the federal government owes to government programs such as Social Security and Medicare.
Why would the listed types of investors buy the debt of the U.S. government?
Where does the money come from that the money borrows from programs like Social Security and Medicare?

12. DEBT, DEFICITS, AND SURPLUSES
A balanced budget is a budget designed to equate expected revenues with planned expenditures.
Reasons for Annual Deficits
Most are planned to achieve worthwhile payoffs.
As economic performance falters, social services increase and government tries to jump-start the economy with spending and assistance.
Government spending can be judged on the criteria of benefits and costs. The phrase, “worthwhile payoffs” means that our elected officials in Washington make decisions based on the these principles.

13. DEBT, DEFICITS, AND SURPLUSES
Borrowing to Fund Deficits
Treasury Inflation-Protected Securities (TIPS) are U.S. Treasury securities that protect investors against inflation because the amount to be repaid rises with inflation.
The Federal Reserve (the Fed), the central bank of the United States, buys US government securities. When the Federal Reserve uses money that was not in circulation to purchase securities, the practice is called monetizing the debt.
Discuss why the US Government can create or monetize debt to create money. This is difficult for students.
Government securities are purchased by both private investors and the Federal Reserve. When the Fed creates new money to purchase securities, the practice is called monetizing the debt. The resulting increase in the amount of money in circulation generally causes interest rates to fall and encourages business and consumer spending. Creating new money does always printing the money. It can mean that it gives banks the ability to make loans and create new demand deposits. The role the Fed and its monetary policy functions are discussed fully in Chapter 17.

14. DEBT, DEFICITS, AND SURPLUSES
The debt limit is the highest amount that the national debt can reach, as authorized by Congress.
The debt to GDP ratio is important in evaluating a nation’ s ability to repay the debt.
Discuss the concept of the ability to repay debt. Start with a discussion of individuals and tie that to the federal government-an individual has a credit score and a government has a bond rating.
What are the major factors that changed the debt to GDP ratio? Wars, tax changes, economic contractions

15. THE EFFECTS OF THE NATIONAL DEBT
Higher Interest Rates
Dividends are payments made out of a corporation’s profits to owners of its stocks. The federal government makes interest payments to US debt owners.
As investors buy the government debt, they have less funds for private investment.
The crowding- out effect is the constraint on private sector borrowing that results from higher interest rates due to government borrowing.
Crowding out can harm the economy as investment is postponed. New products and research and development spending is lacking. Crowding out is more likely to occur during contractions and when interest rates are low.

16. THE EFFECTS OF THE NATIONAL DEBT
The Burden on Future Generations
The payment of interest on the national debt is called servicing the debt. As the size of the debt grows, the amount of the interest payments must be increased.
The Risk of Foreign Investment
As foreigners buy our debt, the interest payments end up outside the US economy. Without this foreign buying of our debt, we would have less to spend and boost the US economy.
Some Good News about the National Debt
Taxation, printing money, and the ability to pay the interest on the debt is relatively positive news.
When the debt grows, there is a tradeoff. We must pay the interest but this means we must cut spending in another area. The discretionary budget
Find some data to show how foreign investors own about 30% of the US debt then discuss the relative importance. Check

17. LOOKING FOR MACROECONOMIC EQUILIBRIM
Macroeconomic equilibrium occurs when aggregate supply equals aggregate demand.
Fiscal policy is the use of government spending and taxation to pursue economic growth, full employment, and price stability.
Challenge students to come up the board or in notebooks to practice drawing an economy in equilibrium. Review with students what may move the aggregate supply or aggregate demand curves.

18. LOOKING FOR MACROECONOMIC EQUILIBRIM
Disposable income is income after taxes have been removed.
This is the money now available for either spending or saving.
Changes to tax rates and the effect of transfer payments can affect aggregate demand.
Have students discuss gross pay versus net pay. Then explain that net pay is essentially disposable income.
Disposable Income is the bottom line when measuring the strength of the economy. Changes to tax rates and the effect of transfer payments can affect aggregate demand.

19. LOOKING FOR MACROECONOMIC EQUILIBRIM
Expansionary fiscal policy is any combination of government spending and tax cuts meant to spur the economy.
The rightward shift of the AD results in a higher price level but higher RGDP.
To expand the economy we need to increase disposable income (lower taxes) and/or to increase government spending (deficit spending). This is fiscal policy to correct a recessionary phase of the business cycle. We need to “pump” up the economy with stimulus spending and/or lower taxes.

20. Expansionary Fiscal Policy
To expand the economy we need to increase disposable income (lower taxes) and/or to increase government spending (deficit spending).
This is fiscal policy to correct a recessionary phase of the business cycle.
We need to “pump” up the economy with stimulus spending and/or lower taxes.

21. LOOKING FOR MACROECONOMIC EQUILIBRIM
Contractionary fiscal policy is any combination of government spending cuts and tax increases meant to slow the economy down.
The leftward shift of the AD results in a lower price level but lower RGDP.
To contract the economy we need to reduce disposable income (increase taxes) and/or decrease government spending. This is fiscal policy to correct an inflationary economy, The price level is too high and robbing consumer of spending power. We need to “slow down” the economy with lower government spending and/or higher taxes.

22. Contractionary Fiscal Policy
To contract the economy we need to reduce disposable income (increase taxes) and/or decrease government spending.
This is fiscal policy to correct an inflationary economy.
The price level is too high and robbing consumer of spending power.
We need to “slow down” the economy (aggregate demand) with lower government spending and/or higher taxes.

23. AUTOMATIC STABILIZERS
Automatic stabilizers are changes in taxation and transfer payments that moderate changes in GDP and do not require authorization from the government.
Tax Revenues rise in expansionary periods and fall in recessionary periods
Transfer Payments rise in recessionary period and fall in expansionary periods
Automatic stabilizers ocurrs without any vote or discretion necessary by Congress.
Why do tax revenues rise in expansionary periods? Why do they fall in recessionary periods?
Why do transfer payments increase in recessionary periods? Why do they fall in expansionary periods?
Discuss the idea of automatic stabilizers occurring without any vote or discretion necessary by Congress.
Why do tax revenues rise in expansionary periods? Why do they fall in recessionary periods?
Why do transfer payments increase in recessionary periods? Why do they fall in expansionary periods?

24. AUTOMATIC STABILIZERS
Demand-side policy is policy meant to stabilize or stimulate the economy by changing aggregate demand.
Supply-side policy is policy meant to stimulate the economy by increasing aggregate supply.
Why not choose? Incentives for hard work and eliminate regulations where cost is greater than benefit.
Challenge students to think of supply-side policies that would change the aggregate supply.
Debate the idea that positive incentives and elimination of burdensome regulation would be good fiscal policy.

25. THE LIMITS OF FISCAL POLICY
Mandatory Spending
Controversial to change the very popular entitlement programs like Social Security and Medicare. Congress must change the law.
Discretionary Spending
Strong lobbying efforts for specific spending like national defense, medical research, environmental protection and others.
Explain to students why fiscal policy is far from perfect. Even the time to recognize we are in a recession is a recognition lag.

26. THE LIMITS OF FISCAL POLICY
An inside lag is a delay between the onset of a problem and the implementation of a solution.
A recognition lag is the time it takes economists and government officials to realize that the economy is experiencing a problem.
An outside lag is the time between a policy action and the resulting effect on the economy.
Unintended Consequences means poorly timed efforts can push the economy in the opposite direction of what is intended.
Discuss the lag effects in light of the struggles among political parites and their agenda.
Stress that it takes months for fiscal policy changes to spread the effect throughout the economy.