Download Fiscal Policy

Fiscal Policy
How are taxes collected
• “Pay-as-you-earn”
– Taxable income: income on which you can be
taxed
• Personal exemptions and deductions subtracted from
gross income
– Withholding: taking money from your pay check
• Paying Taxes
– Tax return: 1040 form
– W-2: form from employer showing taxable
income
Types of Common Federal Taxes
• Federal income tax –
progressive income tax based
on tax brackets
• Corporate income tax –
subject to numerous
deductions
• Federal Insurance
Contributions Act (FICA)
– Requires withholding to fund
Social Security and Medicare
• Unemployment taxes –
collected from employers
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Other
types
of
Taxes
Excise tax – Consumer tax on a specific kind of merchandise, such
as tobacco.
Tariff – Tax levied on imports to help protect the nation’s
industries, labor, or farmers from foreign competition.
Sales tax – General tax on sales transactions, sometimes
exempting food and drugs.
Estate Tax – tax on the total value of money and property when
someone dies
Value-added tax (VAT) – on increased value of the product at
each stage of production and distribution rather than just at the
point of sale.
Tax Incentive – used to encourage or discourage behavior
Tax expenditure – Loss of tax revenue due to Federal laws that
provide special tax incentives or benefits to individuals or
businesses.
Government Spending
• Distributive policy vs.
Redistributive policy
• Types of Spending
– Direct benefit payments –
entitlements such as social
security
– Discretionary spending
• government programs:
environment,
transportation, assistance
programs
• Defense spending
Spending Policies
• Deficit vs. Debt
– Keynesian economics - Economic theory stating that
government spending should increase during business slumps
and be curbed during booms.
• The Federal Stimulus
– Laissez-faire economics – Theory that opposes governmental
interference in economic affairs beyond what is necessary to
protect life and property.
• Balanced budget
The Federal Reserve System’s 12 Federal Reserve Districts make up the central banking
system of the United States
• All Nationally charter banks required to join
• State-chartered banks can join voluntarily
• Board of Governors
– Appointed by the
president – 14 year term,
staggered
– Chairman: 4 year term,
renewable
• The Board of Governors
1) fixes the discount rate
2) raises or lowers the reserve requirement
3) puts money into the economy through open market
• Federal Open Market Committee
–Makes key decisions interest rates and growth of money supply
Ben Bernanke, Chairman of
the Federal Reserve
Functions of the Federal Reserve
Government Service
• Government’s Banker
• Issues Currency
Regulating Banks
• Reserves
• Bank examinations
Regulating the Money Supply
• Factors affecting demand for money
1.
2.
3.
4.
Cash needed on hand
Interest rates
Price levels in the economy
General level of income
Supply
Value
Prices
Inflation
up
down
up
Deflation
down
up
down
Money
Monetary Policy Tools
Money Creation
• Money created through normal
operations
• Money Multiplier formula
– Initial Deposit x 1/RRR
Reserve Requirements
• Reduction of the RRR allows more
loans, increase supply
• Increase in RRR requires higher
reserves, decreases supply
Setting rates
• Discount (Fed to Bank)
• Federal funds rate (bank to bank)
• Prime rate (Banks to top customers)
Open Market Operations
• Buying government securities
increases the money supply
• Selling government securities
decreases the money supply