Unit 5: Fiscal and Monetary Policy Final Exam Review Unit 5: Fiscal and Monetary Policy

1. Define the different types of tax rates. Proportional: everyone pays the same rate Progressive: as income rises, tax rates rise Regressive: as income rises, tax rates fall

2. Why does our government levy and collect taxes? To have money to spend on the operation of the government To encourage certain behaviors

3. List the different types of state and local taxes State Taxes Sin Tax Gas Tax Vehicle Tax Local Taxes Property Taxes Sales Tax

4. Explain the purpose of FICA taxes To fund Medicare To fund Social Security Remember, you don’t directly benefit from these taxes.

5. What is the difference between mandatory spending and discretionary spending? Mandatory Spending: money must be spent on certain program because a law says so Examples: Social Security, Medicare, Medicaid, Welfare, Unemployment Discretionary Spending: spending that is not required by federal law Examples: Highway funding, military

6. Explain the theory of supply-side economics tax decreases… Lead to more spending and more hiring Lead to economic growth because people have more money to spend

7. Explain the theory of Keynesian economics Government spending… Leads to a reduction in unemployment by creating government jobs Leads to economic growth because more people have jobs and money

8. Explain what the Sequester was about and its effects. A law that required the federal government to automatically cut spending to reduce the National Debt if a deal to reduce the debt was not reached. Effects: slowed economic growth, slight decrease in the debt

9. List the 3 largest spending categories of the Federal Budget Healthcare Social Security Defense/Military

10. Explain the reasons why our National Debt has risen over the last 35 years. increased military spending in the 1980s and 2000s tax cuts the Obama stimulus plan

11. Describe the “pay-as-you-earn” system of collecting taxes. A certain amount of money is taken out of a worker’s paycheck to pay for Federal income tax

12. Explain what budget deficits and surpluses are. Budget deficit: when government spending is greater than government tax revenues Budget surplus: when government tax revenues are greater than government spending

13. Describe the “crowding-out effect”. the government finances increases in spending with money borrowed from the money market (banks) demand for money increases interest rates increase and reduces business investment