Download CH 13 - Kenston Local Schools

Chapter 13
Government Spending
and Taxing
13-1 Fiscal Policy
13-2 Government Budgets and
Types of Taxes
13-3 Budget Deficits and the
National Debt
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
1
Chapter 13
13-1
Fiscal Policy
Learning Objectives
LO1-1 Explain expansionary and contractionary fiscal policy.
LO1-2 Understand the difference between classical and
Keynesian economics.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter 13
13-1
Fiscal Policy
Vocabulary
Two Types of Fiscal Policy
fiscal policy
expansionary fiscal policy
contractionary fiscal policy
aggregate demand curve
aggregate supply curve
macroeconomic equilibrium
Classical Versus Keynesian
Economics
classical economics
Keynesian economics
Laffer curve
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Chapter 13
Two Types of Fiscal Policy
Fiscal policy is the use of federal government
spending and taxes to achieve these economic goals.
Expansionary fiscal policy uses an increase in
federal government spending or a reduction in taxes
to increase real GDP.
Contractionary fiscal policy employs a decrease in
federal government spending or an increase in taxes
to decrease real GDP.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
4
Chapter 13
Two Types of Fiscal Policy
The aggregate demand curve (AD) shows real
gross domestic product that will be purchased at
different price levels.
The aggregate supply curve (AS) shows real gross
domestic product that will be produced at different
price levels.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
5
Chapter 13
Two Types of Fiscal Policy
Macroeconomic equilibrium is the price level
where the aggregate demand curve intersects the
aggregate supply curve.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
6
Chapter 13
Two Types of Fiscal Policy
Vocabulary
CHECKPOINT
What fiscal policy would
be used in a recession?
Explain the goal.
fiscal policy
expansionary fiscal policy
contractionary fiscal policy
aggregate demand curve
aggregate supply curve
macroeconomic equilibrium
To fight a recession, expansionary fiscal policy would be used. The
goal is to increase the aggregate demand curve by increasing
government spending or decreasing taxes.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
7
Chapter 13
Two Types of Fiscal Policy
Vocabulary
CHECKPOINT
Assume that the economy
has an inflation problem.
What fiscal policy would
be used? Explain.
fiscal policy
expansionary fiscal policy
contractionary fiscal policy
aggregate demand curve
aggregate supply curve
macroeconomic equilibrium
To combat inflation, contractionary fiscal policy would be used. The
objective would be to decrease the aggregate demand curve by
decreasing government spending or increasing taxes.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
8
Chapter 13
Classical Versus Keynesian Economics
Classical economics is the theory that free markets
will restore full employment in a recession without
government intervention.
 This theory was introduced by Adam Smith in The
Wealth of Nations.
 His theory was followed by most eighteenth- and
nineteenth-century economists.
 Classical theory assumes that in the long run free
markets will bring about full-employment
equilibrium.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
9
Chapter 13
Classical Versus Keynesian Economics
Keynesian economics is the theory that the federal
government should increase or decrease aggregate
demand to achieve economic goals.
 Keynesian economics is also called
demand-side economics.
 Keynesian economics can also be used
to fight inflation.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
10
Chapter 13
Classical Versus Keynesian Economics
The Laffer curve,
attributed to economist
Arthur Laffer, shows
the relationship
between tax rates and
total tax revenues.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
11
Chapter 13
Classical Versus Keynesian Economics
Vocabulary
CHECKPOINT
Assume an economy is
in recession. Briefly
explain the Keynesian
versus classical
prescription for recovery.
classical economics
Keynesian economics
Laffer curve
Keynesian economics would prescribe that the federal government take an
active role. Keynesians would call for expansionary fiscal policy. Classical
economics would prescribe a passive role for the federal government. Instead
of fiscal policy, the classical solution is to allow free markets to restore the
economy to full employment.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-1 Fiscal Policy
12
Chapter 13
13-2
Government
Budgets and Types
of Taxes
Learning Objectives
LO2-1 Identify the categories of government spending and
taxing at the national, state, and local levels.
LO2-2 Understand progressive, regressive, and proportional
types of taxation.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13
Chapter 13
13-2
Government
Budgets and Types
of Taxes
Vocabulary
Government Spending and Taxing
Categories
sales tax
property tax
The Art of Taxation
tax base
progressive tax
regressive tax
proportional tax
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14
Chapter 13
Government Spending and Taxing Categories
A sales tax is a tax on the value of the sale of
a good or service.
A property tax is a tax on the value of assets.
 Property taxes are collected on the market value of
homes, land, buildings, automobiles, and furniture.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-2 Government Budgets and Types of Taxes
15
Chapter 13
Government Spending and Taxing Categories
Vocabulary
CHECKPOINT
sales tax
property tax
What are the transfer or
entitlement programs of the
major category and second
largest category of federal
government tax revenues?
Transfer payments include Social Security, Medicare, Medicaid, food
stamps, welfare, and unemployment compensation
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-2 Government Budgets and Types of Taxes
16
Chapter 13
The Art of Taxation
A tax base is the form of wealth that is subject to taxes.
 In addition to income, other examples of tax bases
include land, buildings, automobiles, or furniture.
A progressive tax charges a higher percentage as
income rises.
 This type of tax follows the concept that those who
have higher incomes can afford to pay higher tax
rates. As the amount of taxable income rises, the tax
rate rises.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-2 Government Budgets and Types of Taxes
17
Chapter 13
The Art of Taxation
A regressive tax charges a lower percentage of
income as income rises.
A proportional tax charges the same percentage of
income, regardless of the size of income.
 One way to reform the federal tax system would be to
eliminate all deductions, exemptions, and loopholes.
Then simply apply the same tax rate, say, 20 percent
of income to everyone.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-2 Government Budgets and Types of Taxes
18
Chapter 13
The Art of Taxation
Vocabulary
CHECKPOINT
Relate percentages of income
taxes, excise taxes, sales
taxes, property taxes to the
overall impact of progressive
versus regressive taxation.
tax base
progressive tax
regressive tax
proportional tax
Federal income taxes are progressive on taxable income. State and
local government sales taxes and property taxes are regressive.
Therefore, state and local government taxes tend to offset the
progressive impact of federal taxation.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-2 Government Budgets and Types of Taxes
19
Chapter 13
13-3
Budget Deficits and
the National Debt
Learning Objectives
LO1-1 Explain expansionary and contractionary fiscal policy.
LO1-2 Understand the difference between classical and
Keynesian economics.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
20
Chapter 13
13-3
Budget Deficits and
the National Debt
Vocabulary
The Federal Budget Balancing Act
budget deficit
budget surplus
balanced budget
treasury bill (T bill)
treasury note
treasury bond
The National Debt
national debt
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
21
Chapter 13
The Federal Budget Balancing Act
A budget deficit occurs when government spending
exceeds tax revenue.
A budget surplus occurs when a tax revenues
exceed government spending.
A balanced budget is a budget in which government
spending equals tax revenues.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-3 Budget Deficits and the National Debt
22
Chapter 13
The Federal Budget Balancing Act
A treasury bill (T bill) is a security that the federal
government repays in one year or less.
A treasury note is a security that the federal
government repays between one to ten years.
A treasury bond is a security that the federal
government repays between twenty to thirty years.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-3 Budget Deficits and the National Debt
23
Chapter 13
The Federal Budget Balancing Act
Vocabulary
CHECKPOINT
Suppose you are a
Keynesian economist.
What are positive effects of
government deficit spending
on the economy?
budget deficit
budget surplus
balanced budget
treasury bill (T bill)
treasury note
treasury bond
A Keynesian argues that federal government deficit spending
stimulates the economy. As a result, aggregate demand increases and
real GDP grows. Jobs are created, and the unemployment rate falls.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-3 Budget Deficits and the National Debt
24
Chapter 13
The National Debt
The national debt is the total amount owed by the
federal government to owners of government
securities.
 The national debt is the accumulation of federal
deficits over time.
 The national debt crossed $1 trillion in 1982. After
14 years, the debt rose by $4 trillion to reach the
$5 trillion mark in 1996. Fourteen years later, the
national debt had grown by $8 trillion to over
$13 trillion in 2010.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-3 Budget Deficits and the National Debt
25
Chapter 13
The National Debt
Vocabulary
CHECKPOINT
national debt
What makes the national
debt grow? What would
reduce or eliminate growth
in the national debt?
Federal budget deficits are financed with borrowing using U.S.
Treasury securities. Reducing deficits, balancing the budget, or budget
surpluses would decrease the growth in the national debt.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13-3 Budget Deficits and the National Debt
26