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Unit VI Study Guide* - Government & the
Economy
Unit Summary: Unit VI answers the question, “What has been the role of the government
within the American economy, and how have government actions affected the economy?”
We will examine how the government raises and spends revenues, the role of the Federal
Reserve system, the fundamentals of monetary and fiscal policy and the problems associated
with the federal deficit and the national debt.
Big Ideas:
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The government plays a limited, but vital and legitimate role in our market economy by
providing public goods such as national defense and a clean environment, regulating
business and prevent negative externalities, making markets more competitive and
protecting consumers' rights, promoting economic well-being, and defining and enforcing
property rights.
There are economic costs as well as economic and political benefits of government
programs, policies and regulations that serve the public interest.
The Federal Reserve (the Fed), created to meet the nation’s monetary and banking
needs, provides a number of banking services in the U.S. economy.
The federal government, through Congress and the Federal Reserve, employs fiscal and
monetary policies respectively to influence the business cycle—aggregate demand and
supply, unemployment, price levels and GDP.
Essential Questions: (On the take-home portion of the exam, you will be required to answer
one from each group)
Group #1:
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Describe the roles our government plays within our market economy?
What are the economic consequences—costs and benefits—of government programs,
policies and regulations?
 What are the government’s fiscal policy tools, in what circumstances are they
employed, and what influence do they have on the economy—i.e., on aggregate
supply and demand (production and purchasing power), employment, price levels and
the business cycle (GDP over time)?
Group #2:
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What are the services the Fed provides to meet the nation’s monetary and banking
needs?
What are the Fed’s monetary policy goals and tools, in what circumstances are they
employed, and what influence do they have on the economy—i.e., on aggregate
supply and demand (production and purchasing power), employment, price levels and
the business cycle (GDP over time)?
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Topics/Terms:
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Tax
Revenue
Tax base
Individual income tax
Sales tax
Property tax
Corporate income tax
Proportional tax
Progressive tax
Regressive tax
Incidence of a tax
Withholding
Tax return
Taxable income
Personal exemption
Deductions
FICA
Social Security
Medicare
Estate tax
Gift tax
Tariff
Tax incentive
Mandatory spending
Discretionary spending
Entitlement
Medicaid
Operating budget
Capital budget
Balanced budget
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Tax exempt
Real property
Personal property
Tax assessor
Fiscal policy
Federal budget
Fiscal year
Office of Management
& Budget (OMB)
Congressional Budget
Office (CBO)
Appropriations bill
Expansionary policies
Contractionary policies
Classical economics
Productive capacity
Demand-side
economics
Keynesian economics
Multiplier effect
Automatic stabilizer
Supply-side economics
Council of Economic
Advisers (CEA)
Balanced budget
Budget surplus
Budget deficit
Hyperinflation
Treasury bill
Treasury note
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Treasury bond
National debt
Crowding-out effect
Board of Governors
Monetary policy
Federal Reserve
Districts
Federal Advisory
Council (FAC)
Federal Open Market
Committee (FOMC)
Check clearing
Bank holding company
Federal funds rate
Net worth
Money creation
Required reserve ratio
(RRR)
Money multiplier
formula
Excess reserves
Prime rate
Open market
operations
Monetarism
Easy money policy
Tight money policy
Inside lag
Outside lag
Short-Answer Questions—some or all will be used as short-answer questions on the exam:
1. Why does the government regulate business?
2. What does the government do to provide public goods?
3. Describe how the government promotes the well-being of all individuals?
4. Describe the goals of monetary and fiscal policy.
5. Describe the differences between easy- and tight-money policies.
6. Identify the chief tools of fiscal policy.
7. Explain how the federal budget is developed.
8. Identify what role deficit spending plays in the economy.
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9. Describe the methods the government can use to balance the federal budget.
10. What does it mean that the federal income tax is a progressive tax?
11. How does supply-side economics differ from Keynesian economics?
12. How does the Federal Reserve decrease the money supply through open market
operations?
13. How does the money multiplier work?
*Applicable California Economic Standard:
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12.3.2, 12.3.3: Students analyze the influence of the federal government on the American
economy.
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12.6.2: Students analyze issues of international trade and explain how the U.S. economy
affects, and is affected by, economic forces beyond the United States’s borders.
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12.5.3: Students analyze the aggregate economic behavior of the U.S. economy.
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