Economics Part IIThe Role of the Federal Government

Business Cycle, Competition, Monopoly, etc.

Monetary Policy, Inflation, Federal Reserve, etc.

FOCUS

To Tax or Not To Tax – That Is The Question!

Economic Theories The Role of The Federal Reserve

Free Trade vs. Protectionism

AGENDA

NOTE: We have already discussed Adam Smith’s circular flow model and how government, households, and businesses work together to keep the economy moving. Economics Part II looks at the role of government in our economy

◦Taxes - The biggest means for government raising funds is through taxation

Regressive Taxes – tax the poor or low income people a higher percentage than the rich or high income people (Sales tax)

Progressive Taxes – tax the rich or higher income people a higher percentage than poor or low income people (Income tax) Note: The top 25% population pay 75% of all Federal income tax.

The Government Raising Money

Fiscal Policy - Policy of government bringing in money and spending of money.

Income Tax – Tax on income earned from work or investments (FEDERAL, & STATE)

Sales Tax – Tax on goods purchased (STATE & SOMETIMES LOCAL)

Property Tax – Tax on real estate (land or houses) (LOCAL)

Inheritance/Death Tax – tax on money inherited from a deceased person/Money of dead person (FEDERAL & STATE)

Excise Tax – Luxury goods – racing cars, yachts, etc. (FEDERAL & STATE***)

3. Bonds – loans to government that can be cashed in seven, ten, or other time period – PROBLEM - CHINA is taking over our country by buying up bonds.

Reagonomics or Supply-side economics Give tax breaks to big business and give incentives for hiring

people, investing money back into businesses and giving a spark to the economy

More jobs equate better economic conditions for everyone Keynesian economics

Advocates government intervention and action by the central bank to stabilize the economy

Insists that equilibrium, during times of depression, can not be reached on its own. Government spending, specifically on infrastructure, should be used to get the economy moving.

Austrian School Supports laissez faire approach to government or GOVERNMENT

SHOULD LEAVE IT ALONE Entrepreneurship is the driving force in economic development,

see private property as essential to the efficient use of resources, and usually (if not always) see government interference in the market as counterproductive -

Ron Paul - He is a believer in the Austrian School of economics.

Economic Theories

◦ The Federal Reserve System – regulates banks and the amount of money in circulation as well as setting rates that banks must pay to borrow money Created as a way to stop banking panics and the run on

banks for money Took much more power during the Great Depression Jobs

Discount Rate – fee given to banks for borrowing money from

the central bank. It is in the form of a percentage – 5% Interest Rate – fee given to consumers who borrow money

from banks. It is in the form of a percentage and is based on Discount Rate (and consumers credit rating)

Circulation of Money – Keeping the economy running or not.

What is money? – Coins or paper money that is considered legal tender by the government that issues it.

Inflation vs. Deflation The government can’t just print as much

money as it wants to because that would cause inflation or the value of money would be less due to excessive amounts in circulation

Deflation is the value of money increases due to less money being in circulation. Scarcity = higher value.

Circulating Money

The Fed tries to control Inflation/Deflation with its power to set interest rates and controlling, for the most part, how much currency is put into circulation

http://www.youtube.com/watch?v=Yquh-s97qx8

The Government encouraging business development◦ Open Market vs. Protectionism

Free trade or open market takes away tariffs and lets the market work freely

Protectionism tries to protect your own country’s economy by governing in a way that benefits you own businesses over other countries’ businesses.