unit 5 fiscal and monetary policy
TRANSCRIPT
Unit 5: Fiscal and Monetary
PolicyThe Government’s Role
Fiscal Policy
TAXES AND SPENDING!●Fiscal policy deals with changes the government makes in spending or taxation to achieve particular economic goals.●Expansionary fiscal policy is an increase in government spending or a reduction in taxes.●Contractionary fiscal policy is a decrease in government spending or an increase in taxes.
WE USE EXPANSIONARY FISCAL POLICY TO DECREASE THE UNEMPLOYMENT RATE.
WE USE CONTRACTIONARY FISCAL POLICY TO DECREASE INFLATION.
History of Fiscal PolicyJohn Maynard Keynes
In 1936, an Englishman, John Maynard Keynes published a book called The General Theory of Employment, Interest, and Money
During the Depression,he suggested that governments could use their spending and taxation powers to influence the level of spending in the economy.
Get the government to stimulate the economy by hiring people to do desirable public works jobs that do not compete with private projects. Workers would spend their income and businesses would react to that.
TAXESPersonal income tax is a tax people pay on their
income. Personal income tax is paid to both the federal government and most state governments.
Corporate income tax is a tax corporations pay on their profits. Corporate income tax is also paid to both the federal government and most state governments.
Social Security tax is a tax paid to the federal government on income generated from employment. Half is paid by employers, and the other half is paid by employees.
Sales tax is applied to the purchase of many goods, such as cars, clothes, computers, etc. Sales tax is collected by states, not by the federal government. Sales taxes vary among states.
Excise taxes are placed on the purchase of certain goods, such as tobacco and gasoline. The federal government, as well as many states, collects excise taxes.“The federal excise tax on cigarettes is $1.01 per pack, resulting in over $13 billion dollars in cigarette excise tax revenue for the federal government in 2014.”
Property tax paid by homeowners on the value of their property. This is a major revenue source for state and local governments. Simply put, it is a tax on the value of the property.
More on Income TaxThree Types of Income Taxation
proportional income tax: everyone pays at the same rate, whatever their income level. A flat tax is the same as a proportional tax. progressive income tax: people pay higher rates as their incomes rise. Progressive income tax structures are usually capped at some rate. The United States has a progressive income tax structure. Today, the tax rates were 10, 15, 25, 28, 33, and 35 percent.regressive income tax is a tax rate that decreases as income levels rise.
2015 Single Filers Tax Brackets
SPENDING (2011)
Warm-up1. What acts demonstrated expansionary fiscal policy?
2. Which expansionary fiscal policy strategies were performed?
3. Which acts demonstrated contractionary fiscal policy?
4. Which contractionary fiscal policy strategies were performed?
5. When do people spend more of their income?
Monetary Policy
MESSING WITH THE MONEY SUPPLY
Monetary policy is defined as changes the Fed makes in the money supply.expansionary monetary policy is an increase in the money supply.contractionary monetary policy is a decrease in the money supply.
We use EXPANSIONARY monetary policy to lower the unemployment rate.
We use CONTRACTIONARY monetary policy to reduce inflation.
MONEYWhat is money?
Must serve 3 Functions: medium of exchange, Unit of account, store of value
What is the money supply?
M1: Coins, Currency and Demand Deposits (Checking account deposits)
M2: M1 plus savings accounts and some mutual funds
How can we make more money without printing more money?
BANKINGWhere’s my money?
Answer: All over the place
Wait!? They loan my money out?
Answer: Yes, but not all of it
Required Reserves: Bank deposits that the bank must keep (either in the vault or in their account at the Fed) THe amount is based on the reserve requirement set by the Fed.
Excess Reserves: Any reserves held beyond the required amount. This money can be lent out in the form of personal, business, investment loans.
Who’s Who in the Federal Reserve SystemA Board of Governors, headquartered in Washington DC, manages the
Fed.
7 people appointed by the President and confirmed by Senate
12 semi-autonomous Districts Banks
Each district bank has a Committee as well
The Federal Open Market Committee (FOMC)
All members from the Board and the presidents from some of the district banks. 12 members total
Recent Chairs of the Board of Governors Alan Greenspan
1987-2006 Ben Bernanke
2006-2014 Janet Yellen*
2014-
*First Woman Chair
The Tools of the FedFOMC’s Open
Market OperationsBuying and
Selling Bonds
Buy bonds: Increase the money supply=expansionary policy
Sell bonds: decrease the money supply =contractionary policy
The Discount Rate:
The interest rate the Fed charges member banks
Lower the rate: increase the money supply=expansionary policy
Raise the rate: decrease the money supply=contractionary policy
The Reserve Requirement:
The amount of bank reserves each bank is
required to holdLower the requirement: increase the money supply=expansionary policy
Raise the reserve requirement: decrease the money supply=contractionary policy
Who’s to blame for the Great Recession? Step 1: Identify the source of your article. (source A-J on top of the article)
Step 2: Get into groups with those who have the same source.
Step 3: Discuss article with group members. Who is your article blaming for the Great Recession? (The Government, Consumers, or Financial Institutions)
Tip: Some articles are blaming more than one entity!
Step 4: Fill out the graphic organizer for your article with the causes, effects, and a quote as evidence.
Tip: Write small! You’re going to be using this graphic organizer to fill out information from other articles as well.