Read pages (14.3 – Fiscal Policy) & complete Section on “Government Influence on Economy” (A – C)

MPC = change in consumption/ change in income Spending multiplier= 1/mps Tax multiplier= 1/

Students will be able to… Assess the overall health of the current U.S. economy. Identify the rationale behind government taxation. Evaluate government spending. Analyze and evaluate how government solutions/actions affect the U.S. economy. Solve U.S. economic problems

Agenda 12/5/ Quiz review 2.Ferris Buellers Day Off 3.Should we cut spending or cut taxes 4.Fiscal policy basics 5.CNN Student News

Fiscal Policy Fiscal policy- the use of government spending and taxing to influence economic activity

What is fiscal policy? Goals are economic growth, full employment, & stable prices Expansionary Fiscal Policy – – Goal is to stimulate economic activity Increase spending & Lower taxes Contractionary Fiscal Policy – Goal is to slow down economic activity Decrease spending & Increase taxes

Theories of Gov’t Involvement Demand side economics- ensure economic growth by stimulating aggregate demand by increasing spending and cutting taxes on consumers – more money will be put into the hands of consumers – **Bigger gov’t role in the economy! Supply side economics- ensure economic growth by stimulating aggregate supply by cutting taxes on businesses and high-income taxpayers – producers and investors will use their tax savings to expand production and thereby stimulate the economy – **Smaller gov’t role in the economy!

Agenda 12/5/ The debateThe debate 2.Examining fiscal policy impacts 3.Fiscal policy origins 4.Taxing taxes 5.CNN Student News

Fiscal Policy – Use of Gov’t Spending The government’s spending has a magnified effect on the economy due to… – the “multiplier effect” – each dollar spent encourages more spending the “multiplier effect” – each dollar spent encourages more spending Option 1 – spend more = stimulate the economy Option 2 – spend less = slow the economy

Fiscal Policy – Use of Gov’t Spending Automatic Stabilizers- government measures that counter the fluctuation of the business cycle – Examples include: Social Security, Medicare, unemployment benefits, food stamps, tax brackets, etc. They work by increasing or decreasing overall demand

AGGREGATE SUPPLY & DEMAND Examining Monetary Policy & Fiscal Policy Using Supply & Demand

Looks similar right?…

The basics… Aggregate supply = total supply of goods and services produced in the nation’s economy Aggregate demand = total demand for goods and services in the nation’s economy Macroeconomic Equilibrium = when aggregate demand equals aggregate supply

Identifying the Effects of MP & FP When using easy-money or expansionary fiscal policy… – AD shifts right When using tight-money or contractionary fiscal policy… – AD shifts left

Review of Demand-Side / Supply-Side Demand-siders attempt to increase AD Supply-siders attempt to increase AS

Origins of Monetary & Fiscal Policy

Major Economic Theories: 1. Classical Economics- an economic philosophy that focused on how free markets and market economies work; it held that capitalism was self- regulating and required few government controls – Founder: Adam Smith – Legacy: Dominated economic thinking until the Great Depression of the 1930s

2. Keynesian economics- a school of thought holding that government intervention in the economy is necessary to ensure economic stabilityKeynesian economics- – Founder: John Maynard Keynes – Legacy: Has dominated economic thinking since the Great Depression

3. Monetarism- a school of thought which holds that changes in the money supply are the main cause of inflation and of economic expansions or contractions – Founder- Milton Friedman – Many economists admit the Fed should have done more to prevent the Great Depression by expanding the money supply to increase spending and lead to expansion!

Government’s influence on economy -Taxes Read Econ Alive pages & complete section VI (C-D)

Al Capone Task! – What was he known for? – Why was he sent to prison?

“In this world, nothing is certain but _______________ and ________________” - Ben Franklin

A Taxing Debate: Who Should Pay More? Jot down notes during video so that at the end you will be able to discuss this issue (13 min) – n n Check out our current tax rates: Respond Questions: – Should the rich pay more? If the rich pay more taxes, will it hurt our economy and damage “job creators”? – How should we reform our income tax system?

Taxes Tax- a mandatory payment to the government How should we be taxed? – 1. Ability-to-pay: citizens should be taxed according to their wealth/income – 2. Benefits-received: those who benefit from a particular government program should pay for it

Tax Terms you need to know Tax Base: the thing that is taxed – Could be real estate property, personal income, or a consumer good Tax Rate: the percentage rate that the item is taxed

Types/Structures of Taxes 1. Proportional Tax- a tax that takes the same share of income at all income levels

2. Progressive tax- a tax that takes a larger share of income as income increases (based on ability-to-pay principle)

Regressive tax- a tax that takes a smaller share of income as income increases

Tax Examples Sales Tax- a proportional tax on the sale of goods, paid by the customer at the time of purchase Sales Tax- a proportional tax on the sale of goods, paid by the customer at the time of purchase Usually becomes regressive! Most states and many cities have a general sales tax Task! What is PA’s sales tax percentage?

Payroll Tax (FICA)- taxes deducted directly from employee paychecks The 2 largest payroll taxes fund: Social Security Medicare

Individual Income Tax- a progressive tax for the federal government taken from our income

Corporate Income Tax- a progressive tax on company profits

Excise tax- tax on the sale of certain goods the government wants to limit (sin taxes) – Usually regressive! – Both the federal and state governments levy excise taxes on things like alcohol, gas, & cigarettes

Property tax- proportional taxes levied on the assessed value of real property, such as land and homes or on personal property such as cars and boats

Read about Tax Examples Read in Econ Alive pages (use chart on 241 as well) & describe the FIVE tax examples listed under Section D of Notes Packet

Impact of Government Spending & Deficit Spending Read Econ Alive pages & complete section VII (E only)

Fiscal Policy Part II: Government Spending Main sources of Government revenue: – Individual income tax – Payroll taxes – Corporate income taxes – Excise taxes

Budget and Spending: Task! What is a budget? Why are they necessary?

How Does the Federal Government Create a Budget? There are five key steps in the federal budget process : The President submits a budget request to Congress The House and Senate pass budget resolutions House and Senate Appropriations subcommittees “markup” appropriations bills The House and Senate vote on appropriations bills and reconcile differences The President signs each appropriations bill and the budget becomes law

What does the government spend money on? Mandatory spending- fixed by law (interest on the debt, Medicare, Social Security, etc.) Discretionary spending- can be raised or lowered as Congress sees fit (defense, healthcare, education, foreign aid, infrastructure, etc.)

Charts/Graphs et/federal-budget-pie-charts et/federal-budget-pie-charts Examine “Federal Revenues” & “Federal Spending” Pie Charts ators/snapshot-spending-revenue-and-deficit ators/snapshot-spending-revenue-and-deficit Examine “Deficit” Graph

Ten Trillion & Counting “What Obama Inherited”

Deficit Spending Deficit- spending more than what you take in with revenues during one year Debt- the total accumulation of previous deficits (total money owed from borrowing) So the national debt is the total of all of America’s previous deficits Deficit spending- when the government consistently spends more than it takes in

Why does America love to deficit spend?? Mandatory Spending – transfer payments to Baby Boomers – Interest payments Economic stimulus To protect ourselves (national defense) Habit—it’s easy!

What are the effects of deficit spending? Rapidly skyrocketing national debt Inflation High tax burden = discouraged citizens Unease about foreign owned debt

Crowding out effect- increased government borrowing may drive up interest rates, possibly crowding out businesses and consumers from getting loans