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balance with the production of goods and services.
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Government and Money
By Cindy Grigg
Caption: This is a map
showing the districts of the
twelve Federal Reserve
Banks.
The United States is a
big country. The
American government
spends a great deal of
money to run the country.
The Federal Reserve System is the government's bank. It is divided
into twelve regional banks across the country, with its main
headquarters in Washington, D.C. The "Fed," as it is commonly
called, controls the amount of money in circulation. It holds a
percentage of the deposits of commercial banks and lends money to
them when they need it.
The Fed acts like a traffic cop. When the Fed sees there is too
much traffic, or money in the economy, it slows the economy down.
The Fed can require banks to put more money in reserve- that's
money that cannot be loaned. Or the Fed can cause banks to raise
the interest rates on loans to customers. The more interest the banks
charge, the fewer the number of people who want to borrow money.
People have less to spend, so the amount of money in circulation
decreases.
When there is not enough money in circulation, the Fed allows
banks to keep less money in reserve. The banks then have more
money to lend and can lower their interest rates to encourage
customers to borrow more money.
With more money in circulation, people spend more. Businesses
expand and hire more people. But sometimes businesses can't
produce all the things people want to buy. What happens? Prices
may rise. On the other hand, if there isn't enough money in
circulation, people won't spend very much. Businesses will not grow,
and jobs will be harder to find. It's the Fed's job to keep spending in
People help governments by paying taxes. City, state, and the
federal government all collect taxes from people and businesses.
The government uses taxes to pay for the services it provides, such
as schools, libraries, fire departments, some hospitals, roads and
bridges, and the armed forces.
The government collects taxes in lots of ways. You may pay
taxes when you buy goods like food, books, and sports equipment.
This is called a sales tax. Sales tax is a percent of the total cost of an
item. Find out what the sales tax is in your town. Change the
percent to a decimal. For example, 6% is 0.06, and 7 1/2% is 0.075.
Then multiply the price of the item by the percent. You may have to
round the amount off to the nearest penny. Then add that amount to
the price. This amount is the total you would pay for the item.
Adults pay taxes on the money they earn from their jobs.
Businesses pay taxes on the profits they make. These taxes are
called income taxes. People who own buildings pay property taxes
on the property and the buildings they own. If you inherit money or
win the lottery, you pay taxes on the money you receive. All the
money collected in taxes pays for things that benefit everybody.
When the federal or state government needs more money than it
collects in taxes, it has to borrow some. Instead of going to a bank
and getting a loan, it sells certificates called bonds. A bond is like a
loan to a government or any large company. Just like a bank loan,
the borrower must pay interest to the lender. Who is the lender? It
could be you! People buy government bonds as a safe investment.
You can buy a government savings bond at most banks. Your cost is
half of the face value. If you buy a $50 bond, it will cost you $25. It
will be worth face value, or $50, when the bond matures, which
could be in ten years. The time changes with the interest rate. You
can cash in the bond at any time after six months, but the longer you
hold a bond, the more interest it earns.
If the government needs more money than it can get by selling
bonds, it borrows money. When a government spends more than it
has collected in taxes, it has a deficit. Almost every year since 1929,
the U.S. government has had a deficit. The government then has to
borrow money to pay its bills. The money it borrows is the amount
of the deficit. The total amount of money the government has
borrowed over the years minus the amount of money it has repaid is
the national debt. As of November 4, 2007, the national debt is now
more than $9 trillion dollars. If this amount were divided by every
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man, woman, and child in the United States, each person would owe
about $30,000.
That sounds bad! Does that mean our government is broke? No,
it doesn't. The government does borrow a large amount of money,
but it always has repaid its debts. The reason it can do so is because
the U.S. has a large economy that is growing. Our economy is
healthy. Countries with healthy economies are able to pay back the
money they borrow because their economies grow and generate
more money than the country borrowed.
Government decisions about taxing and spending affect our lives
in many ways. Increasing taxes or decreasing government spending
increases unemployment. Unemployed people are paying less
money in taxes to the government. But reducing unemployment by
increasing government spending or reducing taxes increases inflation,
which is rapidly rising prices. Goods cost more, so people get less
for their money. The government's fiscal policy is a powerful tool to
guide the nation's economy. Fiscal policy is the federal
government's spending and taxing policy, which is designed to keep
everyone employed and prices stable. It must be used wisely.
Government and Money
Questions
1. What is the Federal Reserve System?
A. the government's bank
B. a system of twelve regional banks across the country
C. a bank that holds deposits for other banks and loans
money to them when they need it
D. all of the above
2. When there is less money in circulation, what happens?
A. People don't spend as much.
B. Businesses don't grow.
C. Jobs will be harder to find.
D. All of the above
3. How does government pay for the services it provides?
A. mostly by taxing its citizens
B. getting money from foreign countries
C. charging for the services
D. all of the above
4. When you purchase an item, what is the type of tax you pay?
A. property tax
B. excise tax
C. income tax
D. sales tax
5. How does our government get the money it needs to pay its
bills?
A. taxes
B. selling bonds
C. borrowing money
D. all of the above
6. What is a deficit?
A. when a government spends more than it has collected
B. when a government sells bonds to raise money
C. when the taxes it collects are more than debts
D. all of the above
7. How much is the U.S.'s national debt as of November 4, 2007?
A. $9 trillion
B. $30,000
C. $30 trillion
D. $30 million
8. What is the government's fiscal policy designed to do?
A. keep everyone working and keep prices stable
B. guide the economy
C. both A and B
D. none of the above
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How do you feel about the amount of the national debt? Do you think
it's a good idea to borrow so much money? Explain why or why not.
The Fed acts like a traffic cop. Explain this analogy. How is the Fed
like a traffic cop? What does it do?