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

2. 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

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

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

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

6. 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

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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