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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: 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: 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: 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)? 1 Topics/Terms: 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 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 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. 2 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: 12.3.2, 12.3.3: Students analyze the influence of the federal government on the American economy. 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. 12.5.3: Students analyze the aggregate economic behavior of the U.S. economy. 3