Monday EQ: What is fiscal vs. Monetary policy and how do they impact the business cycle?

Every students needs a white board and marker 1.What are the 3 types of economies? 2.Give examples for each. 3.What are the 4 factors for economic growth? 4.What is a tariff? 5.What is a quota? 6.What is an embargo? Name a country we just ended an embargo?

Every students needs a white board and marker 1.Who came up with the idea of the invisible hand? 2.What type of economy does the US have? 3.What are the 3 economic questions? 4.What is scarcity? 5.When is unemployment at the highest rate in the business cycle? 6.What are the three (4 really) types of business structures?

EQ What is Fiscal Policy and how does it impact the business cycle? Today we will: –Finish Walmart video and questions –Collect HW –Review activity –Group activity –Notes –Group activity

The Government provides goods and services Private goods (excludable principle) –Example clothes, food Public goods (nonexcludable principle) –Example parks, library, road

The Government handles externalities Externality-an unintended side effect of an action that affects someone not involved Externalities can be positive or negative –Example: bonuses and pollution Government tries to make the + and prevent the -

The Government Spends your money Externality-an unintended side effect of an action that affects someone not involved Externalities can be positive or negative –Example: bonuses and pollution Government tries to make the + and prevent the -

My pay stub Gross Pay Net Pay My Federal Tax My social security Tax

Different classification of Tax Progressive Tax- rate increases as income increases (punishes the rich) Regressive Tax-rate decreases as income increases (punishes the poor) –Example sales tax Proportional-everyone pays the same

Other types of tax Excise Property Corporate income Estate Gift

How the Government Spends

Mandatory spending Money that lawmakers are required by existing laws to spend on certain programs or to use on interest payments on the national debt

Discretionary Spending Spending that is up to the government officials

State and local Budgets Both must have a balanced budgets (money coming in = money going out) –Last time was when Clinton was in office Look at page 682 Where do states get their money? What about local governments?

State and local Expenditures List 4 examples (684) 4 examples (685)

National Debt Deficit-Spend more money than you have Current national Debt: –Who do we owe?!? Foreign Investors/United States investors in our bonds

Bonds Citizens invest in the country

Fiscal Policy Fiscal Policy is: the federal governments use of taxes and spending policies to affect overall business activity There are 2 different theories regarding fiscal policy

Demand Side economics Demand side economics (Keynesian) Demand drives the economy In a slump, people save not spend To encourage spending, the government should put more money in circulation (taxes or fed policy)

Supply Side economics Supply drives economic growth. More money for people at the top of the economy. Trickle down theory or reganomics

Fiscal Policy Review QHbaDohttps:// QHbaDo

Fiscal Policy Fiscal Policy – government policy toward taxing & spending. Federal Budget Prepared annually by the President Approved by Congress Budget Year – October 1 – September 30 Government Spending Mandatory Spending – does not need annual approval. Discretionary Spending – needs annual approval. Types of Taxation Progressive Tax – tax that takes a larger percentage from the wealthy (ability to pay principle) Regressive Tax – tax that takes a larger percentage from lower incomes (benefits received principal) Proportional Tax – tax that takes the same percentage from all incomes.

GOVERNMENT BUDGET Government Revenue - $ that government has to operate. Taxes, fines, user fees, etc… Government Expenditures - $ the government must spend on programs it operates. Balanced Budget – Revenue = Expenditures Budget Surplus - Revenue > Expenditures Budget Deficit - Revenue < Expenditures National Debt – Accumulation of Budget Deficits

Federal Government Revenue Federal Taxes Income Tax - #1 source of government revenue. Progressive tax on individual earning. Payroll Tax – 2 nd largest source of income Corporate Income Tax – up to 36% of profits. OTHER FEDERAL TAXES Excise Tax Estate Tax Luxury Tax Social Security Tax

Federal Government Expenditure Social Security – 21.2% National Defense – 17.4 % Income Security – 14% Medicare – 13.5 % Health – 10.5% Interest on Debt – 8.2% Other – 15.2 %

State Government Intergovernmental Revenue - $ paid from one level of government to another. States get it from the federal government. Sales Tax – Paid by retail stores to the state government. (passed onto consumers) Income Tax – taken from workers paychecks. Excise Tax – Alcohol, tobacco, & gasoline.

Local Government REVENUE Intergovernmental Revenue – paid by the state government to local governments. Property Tax – paid on land, houses, automobiles, etc… EXPENDITURES Education Police & Fire Protection Water Supply Sewage & Sanitation

FEDERAL INCOME TAX TABLE TAX RATESINGLEMARRIED 10% $0-$8,025$0-$16,050 15% $8,025-$32,550$16,050-$65,100 25% $32,550-$78,850$65,100-$131,450 28% $78,850-$164,550$131,450-$200,300 33% $164,550-$357,700$200,300-$357,700 35% Over $357,700

Monetary Policy

Money & Banking Money Fiat/Legal Tender – money that has value because a government fiat, or order, has established it as acceptable for payment of debts. Medium of Exchange – use of money in exchange for goods or services. Measure of Value – use of money as a yardstick for comparing the values of goods and services in relation to one another. Store of Value – use of money to store purchasing power for later use. Banking Interest Rate – amount of money the borrower must pay for the use of someone else ’ s money. Expressed in a percentage. Prime Rate – rate of Interest banks charge on loans to their best business customers. Loans – money that is given with the idea that it will be paid in return. Collateral – something of value that a borrower lets the lender claim if a loan is not repaid. Credit Unions – depository institution owned & operated by its members to provide savings accounts & low interest loans to its members. Savings & Loans – depository institution that, like a commercial bank, accepts deposits & lends money.

FEDERAL RESERVE Federal Reserve (FED) – created by Congress in 1913 to “ provide for a safer and more flexible banking and monetary system. ” FED – 12 Districts – each served by one bank, divided into territories. FED decisions do not have to be ratified by President or Congress. Appointments to the Board of Governors – President appoints – Congress approves. FED reports to Congress on its policies. Purpose of the FED – control nation ’ s money supply. Tight Monetary Policy – makes credit expensive and in short supply in an effort to slow the economy. (inflation) Loose Monetary Policy – makes credit inexpensive & abundant, to increase money in circulation. (recession) Goal of the FED – balance the need to create long-term growth in the economy – more jobs, consumer goods, continuing higher standard of living – with the need to avoid inflation (higher prices). Tools of the Federal Reserve 1.Discount Rate – the amount of interest that commercial banks pay the FED for borrowed funds. Banks in turn set their lending rates for companies, individuals, home mortgages, and auto loans. 2.Reserve Requirement – the amount of money banks must hold as security for loans. The higher the requirement, the less money banks have to loan. (expressed in a %) 3.Buying & Selling Government Securities – bonds and loans the government has received from private individuals and banks.