Download Basic Instruction Unit 1 - Chandler Unified School District

Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
Money, Taxes, Fiscal, Monetary Policy
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How does the government use taxes to fund programs?
What are the Constitutional grounds for taxation?
What is the impact of federal aid to state and local governments?
How does the government use fiscal policy as a tool for achieving economic goals?
How does fiscal policy impact the economy?
What are the functions of the Federal Reserve System?
What is monetary policy?
KEY TERMS TO REMEMBER
Contractionary Policies – fiscal policies, like lower spending and higher taxes that reduce
economic growth
Deduction – variable amounts that you can subtract, or deduct, from your gross income
Entitlement – social welfare programs that people are “entitled to” if they meet certain eligibility
requirements
Expansionary Policies – fiscal policies, like higher spending and tax cuts, that encourage
economic growth
Federal Reserve System – the privately (Individuals) owned, publicly (government) controlled
central bank of the United States.
 Board of Governors – the seven-member board that oversees the Federal Reserve
System
 Districts – the twelve banking districts created by the Federal Reserve Act
FICA – taxes that fund Social Security and Medicare
Fiscal Policy – Congressional policies that use government spending and revenue collection to
influence the economy
Fiscal Year – a 12-month period that can begin on any date
Interest Rate – the cost of borrowing money
 Discount Rate – the rate the FED charges for loans to member banks
 Federal Funds Rate – the rate member banks charge each other for loans
 Prime Rate – the rate banks charge on short-term loans to their best customers
Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
Medicaid – entitlement program that benefits low-income families, some people with disabilities,
and elderly people in nursing homes
Medicare – a national health insurance program that helps pay for health care for people over
age 65 or with certain disabilities
Revenue – income received by a government from taxes and non-tax sources
Social Security – Old-Age, Survivors, and Disability Insurance (OASDI)
Tariff – a tax on imported goods
Tax – a required payment to a local, state, or national government
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Progressive Tax – a tax for which the percentage of income paid in taxes
increases as income increases, i.e. – federal income taxes
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Proportional Tax – a tax for which the percentage of income paid in taxes remains the
same for all income levels, i.e. – 6%, 10%, etc.
Regressive Tax – a tax for which the percentage of income paid in taxes decreases
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as income increases, i.e. – sales taxes
Taxable Income – income on which tax must be paid; total income minus exemptions and
deductions
Treasury –
 Bill – a government bond that is repaid within three month to a year
 Bond – a government bond that can be issued for as long as 30 years
 Note – a government bond that is repaid within two to ten years
Withholding – taking tax payments out of an employees’ pay before he or she receives it
Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
Money and its Uses
Uses
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Characteristics
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6.
Types
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____________________– objects that have value in and of themselves and that are
also used as money, i.e. salt, cattle, precious stones
____________________– objects that have value because the holder can exchange
them for something else of value, i.e. receipts that could be exchanged for silver or
gold
___________________ – valuable because the government says it is “__________”
Fiscal Policy
Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
How does each of these affect the economy?
Expansionary
Increase government spending
Cut Taxes
Contractionary
Decrease government spending
Increase Taxes
Taxes
Characteristics of a Good Tax:
1. Simplicity – tax laws should be simple and easily understood. Taxpayers should be able
to keep the necessary records, prepare their own ax forms, and pay the taxes on a
predictable schedule.
2. Efficiency – Government administrators should be able to collect taxes without spending
too much time or money. Similarly, taxpayers should be able to pay axes without giving
up too much time. They should also not have to pay too much money in fees.
3. Certainty – It should be clear to the taxpayer when a tax is due, how much money is
due, and how the tax should be paid.
4. Equity – The tax system should be fair, so that no one bears too much or too little of the
tax burden.
History of banking
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1791 – Congress set up a 20 year charter and created the Bank of the United States
1811 – Charter expires and chaos breaks out b/c there is no consistency
1816 – Congress charters the Second Bank of the United States – 20 year charter also
1832 – President Jackson vetoed the renewal of the bank
1827 thru 1863 – The Free Banking Era – basically, chaos again
1860’s – Currencies in both the north and the south
1863/1864 – National Banking Acts resorted confidence in paper money
1870’s – Nation adopted the Gold Standard – a monetary system in which paper money
and coins are equal to the value of a certain amount of gold (See Wizard of Oz)
1914 – The Federal Reserve System was established – the nation’s first true central bank
1933 – Federal Deposit Insurance Corporation (FDIC) is established to insure customer
deposits if a bank fails - $250K per account
Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
Structure of the Federal Reserve System
(Source: Economics in Action. Prentice Hall: Boston)
Federal Reserve Districts
Functions of the Federal Reserve System
1. Serves as the bank of the US Government
2. Serves as the agent for the Treasure Department to sell, transfer, and redeem
government bonds, bill, and notes, or securities.
3. Issues paper currency and removes worn, torn, or old bills from circulation
4. Serves member banks
a. Check clearing
b. Supervises lending practices
c. Lender of last resort
i. Banks generally lend to each other, not the FED
Measuring the money supply
 M1 – currency, checking accounts, traveler’s checks
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M2 – Savings deposits, money market funds, CD’s
Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
Monetary Policy
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Federal Open Market Committee (FOMC) – makes key decisions about interest rates and
the money supply
o Higher interest rates reduces the amount of money in circulation – money is “too
expensive” to borrow. The FED will raise the discount rate (tight)
o Lower interest rates increases the amount of money in circulation – money is
“cheap” to borrow – The FED will lower the discount rate (easy/loose)
Reserves – fractional reserve system [Reserve Requirement Ratio (RRR)]– banks hold a
percentage of each deposit in reserve – generally 5% – 20%. Currently, the reserve rate
is 10%. This rate is not changed often because of the huge impact on the money supply
The lower the RRR, the looser the policy.
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Money Creation – this does not mean the treasury prints money. The
banks simply go about doing business as usual.
Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
In your groups, complete the information below:
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Open Market Operations – the buying and selling of government securities (bonds)
o Purchases – increases the money supply by giving the banks more money to
loan out (easy/loose)
o Sales – decreases the money supply by taking money from the banks leaving
them less money to loan out (tight)
Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
KEY POINTS TO REMEMBER
1. The functions and characteristics of money
2. Taxes provide the government with a source of income with which to fund government
programs
3. There are six major source of revenue: individual income taxes, corporate income taxes,
excise taxes, estate taxes, gift taxes, tariffs.
4. Fiscal policy is used by the Congress to stabilize the economy
5. The FED was created to stabilize the nation’s banking system.
6. The FED uses monetary policy to lessen the effects of business cycles
Questions to Master
1. How does a $1 bill display all six characteristics of money?_____________________________
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2. What is the difference between a progressive tax and a regressive tax?___________________
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Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
3. What is the purpose of FICA? ___________________________________________________
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4. What is an entitlement program? Give three examples and explain their purpose
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5. What is the difference between easy/loose money policies and tight money policies?
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Unit 6- CH 14 – 16
(with a little CH 10 thrown in for good measure)
Government & The Economy
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